Sealing the Deal with Rep & Warranty Insurance

More and more parties to M&A transactions are utilizing representation and warranty insurance (“R&W insurance”) as a tool to reach agreement.  While R&W insurance has been around for many years, its popularity has soared recently, especially in middle market transactions valued between $20 million and $1 billion.  R&W insurance provides coverage for a breach of a representation or warranty that results in losses or an indemnification claim.  While it is available to both buyers and sellers, it is more often used by buyers. The increasing popularity is due to a number of factors, including the growth of the insurance market, which has developed better pricing for policies, expanded policy terms and features to better mirror traditional indemnification packages and established trust in the market regarding the insurers ability and willingness to administer and pay claims. Structure of R&W Insurance Policies Due to the nature of an R&W insurance policy and the developing insurance market, the terms of each R&W insurance policy are negotiated to suit the insured’s needs.  All policies are “claims-based”, meaning that the breach must occur, and the claim must be filed, during the term of the policy in order to be valid. Scope of a Policy As its name suggests, R&W insurance will only cover breaches of representations and warranties in the transaction agreement.  Generally, it does not provide coverage for breaches under the purchase price adjustment provisions, covenants or any provisions other than the representations and warranties.  A policy will typically cover all “operating” representations and warranties,¹ but the insured can also opt to insure only certain reps and warranties.  Most, if not all, policies...

Captive Insurance: What is it and how might it work for you?

WHAT IS A CAPTIVE? A captive insurer is a legal entity formed primarily to insure the risks of one corporate parent or a number of similar corporations (e.g., trade associations) thereby contributing to a reduction in its parent’s total cost of risk. Captives are usually domiciled in a specialized location, either offshore or onshore, and sometimes write business unrelated to their parent. Captives are formed for many reasons: Lack of commercial market for certain lines of coverage. Desire to recapture underwriting profits and investment income that would otherwise be earned by the commercial underwriter. As a means to access the reinsurance market. In certain circumstances, as a means of diversifying into insurance services. Captives are used extensively throughout the world by major corporations to cover risks situated both at home and abroad. The largest developments historically have been in the United States, the United Kingdom, and Europe, but recently, considerable interest has been evident in South America, and in the Far East, particularly from Japan and Australia. As the trade barriers throughout the world are lowered and companies become more internationally-oriented, insurance buyers are taking a more global approach to risk financing. Captives can play an integral role in the successful implementation of a global risk financing strategy. TYPES OF COVERAGE The most popular lines of coverage written by captives are general/public/third party liability, property, workers’ compensation/employers’ liability, and auto liability. Non-traditional lines of coverage historically may not have been prevalent in captives, but have been growing in popularity in the last several years. The most common example of non-traditional or core captive coverage is crime insurance/crime deductibles. In...

Tips for Managing Health Care Costs

Despite the bumpy rollout of the federal health insurance exchange, continuing legal battles and a delay in implementation of the employer mandate, the Patient Protection and Affordable Care Act (ACA) remains intact. Because the ACA continues to significantly impact company benefit plans and health care costs, now is the time to develop a health care strategy that meets your company’s long-term objectives while managing your cost. A few strategies employers have implemented are discussed below. Captive Insurance Captive insurance is a form of self-insurance where a company forms and funds a separate entity (a “captive”) to insure the company. Once formed, a captive operates much like any commercial insurer—it issues policies, collects premiums and pays claims on behalf of the company. Historically, captive insurance has been used as an alternative form of risk management for companies looking to self-insure against high-cost risks or risks for which the commercial insurance market does not offer a product. In the past, few states had captive legislation and many captives were formed offshore in places like Bermuda and the Cayman Islands. Today, captive legislation is more common domestically with Vermont, Hawaii and South Carolina being the most popular domiciles for domestic captives. North Carolina passed new captive legislation in 2013. Using a captive can offer the owner a number of benefits not provided by a commercial insurer, such as more control over the cost and administration of the company’s insurance along with certain tax advantages. On the other hand, forming a captive may mean high initial costs and an additional administrative burden. Other benefits and drawbacks include: [jbox radius=”1″ jbox_css=” background-color:#56907A; border:0px;” content_css=”color:#FFFFFF;”]...