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Risk & Insurance in Mergers & Acquisitions

1. Introduction

Airmic 1st June 2016

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 ‘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 buyer and seller and can help to avoid future value reductions in the acquired business.

Insurance due diligence can help in making informed decisions regarding the past liabilities and in structuring a cost-effective insurance programme that meets the future needs of the business. This assists the team in incorporating any unexpected costs into the deal. Further, it helps ensure that key insurance-related risks are identified and understood, as these can often have a direct impact on revenue. In particular, 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, transactional liability products can be used to enhance the position of the buyer or seller, or used to overcome potential issues within the deal negotiations. The main products are warranty and indemnity (W&I) and tax insurance.

For sellers, transactional liability products 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 deal issue from the 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.

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