Merger-related insurance coverages grow
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The number of representation and warranty insurance policies issued more than doubled to 700 in 2014 as policyholders sought more protection for exposures related to mergers and acquisitions, says Marsh USA Inc. and law firm Dechert L.L.P. in a report issued Tuesday.
The coverage generally functions as a substitute for a portion, or all of, a seller's indemnification obligations for breaches of contractual representations in an M&A transaction.
Last year, more than 80% of the policies purchased were buy-side policies, according to the report, “Representation and Warranty Insurance: No Longer Optional, deal Terms and Trends, Summer 2015.”
Policy coverage limits range from as low as $5 million, although polices with limits below $10 million “have become increasingly more difficult and expensive to obtain,” to as much as $350 million in insured limits, which is to a large extent limited by the availability of underwriting capacity, according to the report by the New York-based brokerage and Philadelphia-based law firm.
Buyers should expect to pay a one-time premium of about 3.25% to 4% of the coverage limit for a policy that has a coverage limit of between $10 million and $40 million, with a retention amount that is generally 1.25% to 2% of the transaction value, according to the report.
Marsh reported in March that in 2014 that its clients placed a total of $7.72 billionin insured limits in the transaction risk insurance market, which is predominantly representation and warranty insurance, but also includes tax and contingent liability insurance.
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