Risk & Insurance in Mergers & Acquisitions

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This document provides guidance on the types of deals companies undertake and outlines the key insurance and risk management related implications, together with the insurance tools that are available to support a transaction.

In the UK, a contract to buy or sell a business is based on the principle of ‘caveat emptor’, known as ‘let the buyer beware’. This means that it is the buyer’s responsibility to be comfortable with what they are buying. The deal negotiations and information-gathering part of the M&A process are very important to both the buyer and the seller and can help to avoid future value reductions in the acquired business.

Due diligence can help in making informed decisions regarding exposures attaching to a target business and assists a buyer in incorporating any unexpected costs into the deal. Further, it helps ensure that key risks are identified and understood as these can often have a direct impact on revenue.

Where the acquisition involves the acceptance of past liabilities, the quality of the target company’s historic insurance policies can be as valuable as its physical assets or market share.

In addition, transaction risk insurance solutions can be used to enhance the position of the buyer or seller or used to overcome potential issues within the deal negotiations. Transaction risk insurance solutions include warranty and indemnity (W&I) insurance, tax liability insurance, contingent risk insurance, title insurance and environmental risk insurance.

For sellers, transaction risk insurance solutions can be used to enhance the exit value and, for buyers, they can provide additional financial comfort or a method for them to remove a tricky deal issue from the negotiating-table.

This document reflects insurance and legal practice in the United Kingdom, although many of the principles will apply to other territories. This document does not constitute legal advice and members should refer to their advisors on all aspects of this guide.