1. In-House Counsel Masterclass: Corporate M&A Trends
Tuesday 18 June 2019

2. Welcome David O’Donnell, Partner & Head of Corporate
Mason Hayes & Curran

3. Warranty and Indemnity Insurance
William Dillon-Leetch, Partner
Mason Hayes & Curran

4. W&I Insurance
A refresh on some fundamentals
Insurance provided to either a Buyer or a Seller for loss arising out of a breach of a representation, warranty or indemnity in context of an acquisition
Covers unknown and unforeseen risks only (some exceptions)
Buy-side policy - No requirement to pursue the Seller before claiming under the policy
Importance of due diligence and proper disclosure exercise

5. History and ‘Coming of Age’
Then and now
Then
Now
Introduced to market 30 years ago, originating in US and UK
Reasonably priced and fast track underwriting process in “deal time”
Typically sell-side policy
Initially highly-priced with questionable coverage
Typically buy-side policy
Specific, tailored coverage
Small number of insurers
Multiple, specialised insurers
Lengthy underwriting process tending to delay transaction
Market capacity +€300m per transaction

6. Buy-Side vs Sell-Side - Strategic Uses
Buy-Side Policy
Sell-Side Policy
Prevalence
More common (circa. 95% of policies)
Less common (circa. 5% of policies)
Insured Party
Buyer is covered against losses with direct recourse to insurer
Seller is covered against losses (and the buyer can be named as the loss payee)
Strategic use
Corporate Auctions – Bidders can differentiate bids by using W&I
Assuages concern for buyer as to strength of covenant of a seller
Avoids requirement for escrow/holdback
Protects relationship where ‘management warrantors’ give warranties, but remain in place post-completion
International deal where Buyer not confident of bringing claim in local jurisdiction
Removes obligation to provision for residual liabilities
Frees up sale proceeds for re- investment/return to investors
Generally kept confidential from Buyer

7. Typical exclusions Exclusion Commentary Known Issues
Significant gap in cover in two key areas:
Liability for matters known to Buyer are excluded from W&I cover
Claims under Tax Deed are qualified by Buyer’s knowledge
Policy Excess
Also known as Retention/Deductible/Attachment Point
Fixed amount of insured loss that the Seller/Insured must suffer before policy will respond (generally non-tipping)
Split Signing and Completion
No cover for defects arising in the period between signing and completion
Consequential Loss
Standard exclusion
Categories of unknown risks typically excluded
Condition of Assets, GDPR, Pre-/Post-Completion Reorganisations, Product Liability, Bribery/Corruption, Pollution/Contamination, certain tax issues (transfer pricing, secondary tax liability, availability/valuation of tax losses, etc), holiday pay, pension underfunding, criminal fines/penalties

8. Recent innovations and examples of enhancements
Quantum
Warranties
Tax Deed
No Excess with Nil Seller Recourse
Insurers willing to underwrite on basis of nil seller recourse in certain circumstances -
‘first euro’ basis for recovery
‘Knowledge Scrape’
Policy can disapply ‘so far as the Seller/Warrantor is aware’ qualifiers
Specific Indemnity Policies
Tax issues too difficult to underwrite can now be insured under separate ‘specific indemnity’ policies (transfer pricing, tax residence, identified issues )
Definition of “Damages” and “Losses”
Policy can apply indemnity measure of damages and can include consequential loss
Disclosure of Data Room/DD Reports
Policy can deem these items not to be disclosed
Knowledge qualifying claims under Tax Deed
Policy can disapply knowledge qualifier to Tax Deed and also disclosure of tax issues identified in DD Report
Time Periods/Quantum
Policy can extend time periods and quantum/insurance limit for claims under warranties
Defects arising between signing and completion can be covered
These can be covered but are expensive, typically 10-15% additional premium per week
Synthetic Warranties & Tax Deed
Provided by Insurer and not the Seller/Warrantors, outside of the SPA

9. Underwriting Process Phase 1 – Non-Binding Indications Action
Description
Documents
Timing
Kick-Off Call
Broker briefed on transaction
rationale/motivation for using W&I policy
policy parameters (cap, excess, insurance solutions available, etc.)
Broker NDA/Confidentiality Agreement
Day 1
Broker Analysis
Review of deal structure and transaction documents
Broker formulates strategy for going to market of insurers
Draft SPA & Tax Deed, IM, Group Structure & Accounts
Day 2
Go to Market
Broker Summary circulated to insurers/underwriters
Request for non-binding indications (NBIs) of key terms, including coverage, pricing and excess
Broker Summary
(plus supporting documents above)
Day 3 to 4
NBI/Market Feedback Report
Broker collates NBIs into Market Feedback Report
Report sets out insurance options and recommendations (incl. analysis of price, coverage terms, execution risk etc)
NBIs & Market Feedback Report
Day 5
Client Engagement
Discuss Market Feedback Report with client and select primary insurer to engage in policy negotiations.
Client enters expense agreement to cover underwriting expenses (e.g. DD expenses) (sometimes waived)
Expense agreement
Day 6

10. Underwriting Process Phase 2 – Underwriting and Policy Negotiation
Action
Description
Documents
Timing
Insurers Underwriting Review
Broker engages selected insurer(s) to commence underwriting
Insurers and their external counsel review DD reports and prepare underwriting questions
Written underwriting questions forwarded by insurer and responded to by client
VDR Access, Transaction Documents, DD Reports, Mgmt Accounts, HH Letters
Day 7 to 14
Underwriting Call
Conference call between insurers and Buyer’s deal team/advisors
Discuss underwriting questions and any outstanding concerns insurers have around the transaction
DD Reports
Day 15
Policy Negotiation
Insurers issue first draft of a policy following underwriting call
Brokers and lawyers mark-up policy to ensure it responds to loss under Transaction Documents
Try to broaden coverage and include enhancements
Draft Policy
Day 16
Policy Inception and Signing
Once policy is fully negotiated, coverage will be put in place at time agreed in transaction documents, usually on signing
No claims declaration will be required on behalf of Insured
Final Policy and No Claims Declaration
Day 17

11. Making a Warranty Claim
Hurdle
Policy Excess exceeded?
YES
Breach of an Insured Warranty is clearly identified?
Policy has not excluded the issue leading to the breach?
The matter was not disclosed to the Insured on inception
The Insured can show a financial loss is caused by the breach of warranty
CLAIM IS PAID WHEN ALL CONDITIONS ARE MET
Credibility of W&I policies?
Establishing liability is quick, but calculation/agreement on quantum of loss takes time
Insurers will investigate with involvement of experts
Involve W&I Broker when making a claim

12. Key Takeaways – W&I Insurance
W&I claims on the rise: sophisticated, repeat Buyers more familiar with product and understand when they can/cannot claim
the bigger the transaction, the more likely a claim
over 50% of claims made in first 12 months
Synthetic Warranties and Tax Deed: mostly in liquidator/receiver sales (must be thorough DD)
Start-up Insurance: cover warranties a Founder may be required to give to an investor (e.g. VC) – more expensive
Enhancements: US clients pushing European insurers for terms/enhancements available in US (e.g. indemnity basis for recovery)
Premiums falling: - More competition, more entrants
- 0.5% to 1.7% of Insurance Limit

13. For further information and advice, please contact one of our team:
Irish Private M&A Study 2019