Transactional Liability Insurance Defined B


Broker Perspective


Charles Langdale


Managing Director, Financial Institutions


clangdale@ howdengroup.com


It is not surprising that there has been a boom in demand for Transactional Liability Insurance over the past few years. The culmination of the banking crisis, the Euro crisis and a general shift in risk appetite across large swathes of the Western world provided the driving force behind the demand for an efficient and cost effective risk transfer mechanism to facilitate Merger and Acquisition (M&A) transactions. The insurance industry has responded in earnest, revamping what was an ageing Transactional Liability Insurance product in to the streamlined tool we see used in wide array of transactions across the globe today.


Charles Langdale joined Howden in 2002, and is now the Managing Director of Howden’s international Financial Institutions Division. He has 13 years’ experience in the placement of Directors’ and Officers’ and Financial Lines insurances, and has both a client and market facing role, as well as


managing the business, which has grown tenfold over the past eight years.


After graduating from the University of Bristol in 1996, Charlie joined Aon Professional Risks in London concentrating on their Financial Institutions and Directors’ and Officer’s specialisations. During this period he gained a professional qualification and became an Associate of the Chartered Insurance Institute.


What is it? Transactional Liability Insurance is designed to assist the M&A process by transferring the risks associated with a breach of a warranty, an indemnity or a tax covenant, detailed in an acquisition agreement, to the insurance market.


The range of Transactional Liability polices include covers in respect of:


n Representations and Warranties n Specific Tax Liabilities n Specific Environmental Liabilities n Litigation Buy-Out n Portfolio policies.


In the past, policies have been perceived by many corporates, private equity houses and law firms as unwieldy with limited coverage, large premiums and a lengthy placement process.


Recently, the product has undergone a fundamental transition. Insurance is now considered by the above and many others, to add significant value to the M&A process. Within a week a single policy can be placed, covering a broad range of risks in the acquisition agreement for a one-off premium.


Howden has seen an increase in demand for the product from not only large corporates, but also real estate and private equity firms.


Who buys insurance? Transactional Liability Insurance can be purchased by either the buying or the selling party.


What triggers the policy? The policy is triggered by breach of a warranty, indemnity or the tax covenant outlined in the acquisition agreement.


A buy-side policy is ‘first-party’ insurance; the buyer directly claims from the insurer for the financial loss that they suffer following a breach of warranty, indemnity or tax covenant. There is no need to involve the seller.


A sell-side policy is ‘third-party’ insurance. The insurer indemnifies the seller for the costs involved in defending and settling a claim.


Why insure? Buy-side n Removal of counterparty risk - seller unwilling or unable to indemnify buyer


n Allows for financial recourse if a breach of warranty occurs post-completion, without damaging working relationships of retained management


n Reduces the heightened risk involved in cross- border deals including seller fraud


n Can help with raising acquisition funds/debt by providing confidence to the lending parties and naming them as loss payees on the policy.


28 Author Viewpoint


Risk and Insurance in Private Equity and M&A 2012/13


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