Warranties and Indemnities Cover in the Changing World of Investment
New approaches to mergers and acquisitions being undertaken by private equity firms are creating new challenges that require innovative insurance solutions.
In recent times Marsh’s Private Equity and Mergers and Acquisitions (PEMA) services Pacific team has seen unique transactions that have required bespoke warranties and indemnities (W&I) policies to be developed to protect both the buyers and sellers.
One transaction for which the team placed a W&I policy was effectuated through the subscription of shares to be carried out over three phases. At each phase, if certain key performance indicators were met, the private equity firm would invest additional sums in order to increase its shareholding percentage, up to a maximum level of just under 50 percent. An added complication in this deal was that the sellers continued to manage the business.
This structure presented two challenges: firstly, it was a requirement that the W&I insurance coverage (and specifically the calculation of “loss” under the policy) tracked the increased investment percentages as they adjusted upwards, and secondly, the insurance negotiation needed to be carried out in a collaborative manner between the buyers and sellers. The team helped develop a creative W&I insurance structure, then conducted a full marketing effort to procure flexible insurance capacity on those terms. Once an insurer was selected, the PEMA team negotiated the terms, and helped to ease a fraught negotiation process between the private equity firm and the sellers through tact, courtesy and diplomacy.
In the end, the team provided a W&I insurance solution that would serve to compensate the private equity firm on a “grossed up” basis for warranty breaches as the firm’s share percentage increases. This innovative use of W&I insurance helped the transaction proceed to completion.
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