Dealing With A Safety Net

More M&A-insurance products are helping prepare risk-ridden merger candidates before the honeymoon.

“I’ve been consulting on mergers, valuations, and acquisitions for 17 years, and I just don’t see the need for M&A insurance,” adds Steven Grove, owner and principal of S. Grove & Associates LLC, a Hamden, Connecticut, accounting and consulting firm. “It’s like getting married. You have to do the dating and courting before you walk down the aisle. Sure you can get a prenuptial, but what does that say about the partners’ confidence in the arrangement? Instead of buying insurance for bad decisions, why not just make the right decision?”

Aon’s Krauter, though, says M&A risk coverage provides the security to create partner confidence. “Given high merger failure rates and the horror stories of companies that have become unglued, it is imprudent to think due diligence alone provides all the answers,” Krauter says. “Why keep your fingers crossed over a potential partner’s unpredictable liabilities, when you can transfer them to a third party?”

That’s certainly the view at Premier Parks. Aon’s unearthing of the hidden liabilities and subsequent transfer of these exposures “gave us the comfort of knowing what we were taking on when we acquired Six Flags,” says CFO Dannhauser. “The element of surprise–the enemy of shareholders and Wall Street–was taken away.”

Insuring a Good Deal

Some merger-related policies that are gaining popularity

Type of Coverage Extent of Coverage Policy Term Premium Policy Limits Available
Covering Direct M&A Risks:
Representations and Warranties Insurance Designed to replace or reduce indemnification requirement under purchase-and-sale agreement Up to seven years or statute 4% to 10% of the policy limit $1 mill. to $200 mill.
Tax Opinion Liability Insurance Designed to address potential liability resulting from an adverse tax ruling Statue of limitations 5% to 10% of the policy limit $1 mill. to $200 mill.
Aborted- Bid Cost Insurance Designed to reimburse the company for external costs resulting from an aborted transaction Must incept no later than 5 days after signing letter of intent; coverage typically runs 12 months Average is 5% to 10% of the limit $1 mill. to the $50 mill.; typically 1% of the transaction size
Envirocap Designed to cover cost overruns from environmental remediation projects One year or term of project, whichever is less 7% to 10% of estimated cleanup costs $1 mill. to $100 mill.
Portfolio Transfers Designed to assume a company’s entire portfolio of multiple liabilities (often casualty or product liabilities) Immediate transfer of liability; aggregated Varies Varies
Covering M&A Financial Risks:
Litigation Liability Cap Coverage Designed to cap liability associated with existing litigation Determined through resolution of litigation Varies Varies
Litigation Risk Arbitrage Designed to transfer the entire liability for the litigation to an insurance company for a one-time premium Immediate transfer of liability Agreed- upon valuation of claim and buffer Varies
Litigation Retro Funding Designed to provide the insured company an alternate method to finance a settlement Multiyear policy Settlement amount plus risk- transfer premium Varies

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