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[Best of the Podcast] Specialized Insurance for Your Next Deal
POSTED 12.19.18 M&A Masters Podcast

This episode was originally published on April 20, 2018.

With typical insurance covering your home or car, it can be like pulling teeth to get a claim paid. Unfortunately, that leads to skepticism about all types of insurance.

But in the experience of my guest Joe Finnerty, a litigation partner with law firm DLA Piper in New York City, companies are ready and willing to pay claims for Representations and Warranty insurance.

It’s one of the newest – and most effective tools – being used in mergers and acquisition deals today.

Insurance companies actually pay claims, says Joe. You, as the buyer, just need to help them out a bit.

Check our conversation to find out…

  • Why you should be an “open book” with your insurer
  • How to get your claim paid faster, with the maximum amount
  • The “education” you need to give your insurer for them to pay a claim
  • Ways a broker is an essential part of your claim
  • And more

Listen now…

Episode Transcript:

Patrick Stroth: Hi, there. This is Patrick Stroth with M&A Masters. We’re wrapping up the year 2018 and there’s been quite a bit of growth in rep and warranty which we’re thrilled with. We also really appreciate you guys have been listening on the podcast as our database has grown two to threefold in the last years, so thank you very much for that.

One of the things I’ve noticed with the development of rep and warranties, there’s still a little bit of reluctance in the legal community on the usage of the product, largely because I believe there’s a subconscious concern that with insurance, insurance is just not going to be there to respond when a claim is posted. For attorneys, they’re a lot more comfortable with having a solid contract, so they can paper around it and holding on more of the seller’s money because cash on hand is the greatest sense of security for their clients.

To that end, I want to go ahead and replay a recording with an interview that I had with Joe Finnerty of DLA Piper, where he explains point on how rep and warranty insures, not just particular carriers but the industry as a whole have really gone above and beyond to get it right in terms of a plan, and where rep and warranty as a solid performer does more than your other insurance products out there. So without further ado, I want to give you Joe Finnerty.

This week on the show, we’ve got Joe Finnerty of the law firm DLA Piper. Joe’s the leading litigation partner where he specializes in counseling and dispute resolutions for leading insurance companies. Joe is most recently had been focused on representing M&A transaction insurers and disputes arising under their program, now rep and warranty insurance. In addition to this work, Joe is regularly litigating non-insurance M&A matters, as well as fiduciary actions and fraud for both private and publicly held companies. Joe, thanks a lot for being here and welcome aboard.

Joe Finnerty: Very happy to be here Patrick, thank you very much for that introduction.

Patrick Stroth: Well, thanks. Joe, tell us how did you get started with corporate litigation?

Joe Finnerty: Well, I started as an associate at a firm called Rogers and Wells, which has now been merged into a firm called Clifford Chance here in New York. One of the clients of that firm was a company that we all know called Chubb Insurance Company. I began doing work back in 1987 when I was a baby associate for Chubb, and that relationship has actually lasted all the way until now.

I’m continuing to do work for Chubb, but it obviously branched out into some expertise in litigating matters for insurers generally. I moved from Rogers and Wells, and then formed my own firm. Then after a few years in that firm, I rolled that firm into the predecessor of what is now DLA Piper, a firm called Piper and Marbury here in New York City, and I’ve been with that firm since 1996 and building a practice representing insurers worldwide.

That’s really how I got started representing insurers doing just about everything you can imagine for them from dispute resolution short of any arbitration or litigation, to full blown litigation over just about any problem that an insurance company can have.

Patrick Stroth: Fantastic. Well, I’d say you picked well with DLA Piper. In 2017, DLA Piper was actually just recognized as one of the leading law firms, top three law firms in handling M&A transactions and disputes both in terms of number of deals handled and transaction volumes. So, congrats to DLA piper.

Joe Finnerty: Right.

Patrick Stroth: It’s in the area of mergers and acquisitions that I wanted to talk to you. The program that’s out there now, one of the newest tools being used is an insurance product called Rep and Warranty Insurance. Now as you know, the purpose of the product is where the seller makes disclosures to the buyer, and the buyer will perform due diligence on those disclosures called reps and warranties. Based on their view, the reps and warranties, they make decision whether or not to purchase the company.

If those disclosures are inaccurate and post-deal, some new revelations come along that harm the buyer financially, well, there are remedies where the buyer can go after the seller either from withholding funds in escrow or clawing back other proceeds which has developed a big tension as these agreements are negotiated. Well, the insurance industry came along and said “Why don’t we do this? We will come in, review the disclosures. We’ll look at the due diligence performed and if everything looks good for a price, we will take on that indemnity risk. We will transfer that indemnity obligation away from the seller to the insurance company.”

“Buyer, you have confidence that you will have certainty of collection if there is a breach, we will pay the loss. For the seller, sellers love this because now all of a sudden, they don’t have to have funds held in escrow, so they get more cash at closing. Then, their indemnity exposure’s gone because it’s transferred to the insurance company, they get a clean exit.” All this is predicated on the trust that the insurance company will actually in the event of a breach, actually pay a claim.

The popular cynical notion between the public and insurance companies is that, “Well, this is great until a claim comes, but do the insurance companies actually pay these types of claims?” I think you’re in great position to tell us, give us your experiences as somebody who has been involved in these very, very claims.

Joe Finnerty: Yes. Actually, I am in a sort of catbird seat to describe the situation as it is now with insurance in place as compared to the universe of disputes over M&A transactions prior to the advent of reps and warranties insurance, because I did litigation for buyers and sellers in those post-closing disputes before there was anything such as reps and warranties insurance. I know what those disputes are about, and how they get litigated, and what the difficulties are in getting those kinds of disputes resolved before there was insurance, and now I know the world after insurance.

As you were indicating at the very beginning, because of the size of DLA Piper’s M&A transactional practice, there are quite a few M&A matters that end up in disputes, and I’ve seen quite a volume of those over the years. I’ve not just by my participation, but I’ve also been consulting as a partner on other deals, so I have a very good sense of what the dispute resolution world was before there was insurance and what there is now that there is insurance.

I have to say that it is a common misperception, and I’ll say this in the context of not just reps and warranties but generally insurance, that insurance companies in some matter want to just hold on the money and not pay valid claims. That has frankly never been my experience, and I’ve worked with I would say just about every major US insurer that has had sizeable claims and has had dispute resolution proceedings about them. I have not once had any senior executive at any insurance company say, “Let’s prolong this dispute, so we can hold on to our money.”

That’s just never happened, and I think one of the things that generates that misperception is that, and this is true in the context of reps and warranties as well as other disputes that involved liability insurance. The insurance company is coming into a dispute after the parties have fairly well-defined what the issues are. So, there is an education process that’s required for the insurance company to get in to a position where it can rationally and thoughtfully decide how to quantify the volume of the size of a claim and how much is insured under a claim.

That process sometimes feels tedious to insureds, and it is not tedious to the insurer who’s being asked to write a check. The tension between informing an insurer and asking the insurance company to get up to speed, and the speed with which an insured would like to get paid is I think the crux of the friction that causes that general perception to exist in the market place. Now, turning to which I think is a mistake and a misnomer, a mistake in perception. Turning to reps and warranties, I think that’s probably where you want to focus the conversation, if I’m right Patrick. Is that right?

Patrick Stroth: Yes. Absolutely, correct.

Joe Finnerty: Go ahead.

Patrick Stroth: The perception then is, if somebody doesn’t get their check immediately, it’s not because the insurance companies grinding away, look with a fine-toothed comb through the contract to find out where they can carve out or exclude a loss. It’s more where you may have an entertainment company and the insurance does not know the entertainment industry completely, and so they’re just trying to educate themselves on what the financials look like from an entertainment company versus they just did a steel mill the day before, and before that with a technology company. They’re just trying to learn the business to get it right.

Joe Finnerty: I think that’s exactly right, and learn the facts that they need to learn in order to understand the nature of the claim that’s being presented. In the reps world, this is particularly true. I think just about every insurance company or every insurance company I know is more interested in paying claims than they are in anything else related to this market. It’s a very competitive market. There are lot of insurers out there, and as you expressed at the very beginning here, everyone understands that the viability of this product will depend on the willingness of insurers to effectively engage with the insured, understand the claim at a sophisticated level, at a very fast pace, and pay valid claims.

Every insurer that I know in this market is working very hard to become as sophisticated as possible about managing, understanding, organizing the facts and sifting through, and analyzing what’s presented in order to quantify and pay claims as quickly as they possibly can. I feel like I sound like I’m selling insurance here, but it’s really the … The truth of the matter is, the faster the pace of an insured giving information to the insurance company that in an organized way so they can analyze the claim, the faster they will be paid.

There is no interest on anyone in this market right now or anytime in the future that I can foresee that an insurer will want to hold on the money for any reason other than just the process and understand exactly what’s going on with the claim.

Patrick Stroth: Well, you’ve just destroyed a very popular myth out there, crashing down with the insurance carriers. They do want to pay. They like to pay sooner rather than later. They just want to get it right, which flies in the face of just the knee-jerk popular belief out there.

Joe Finnerty: It does.

Patrick Stroth: You mentioned an issue there with regard to the people putting together information for you. If somebody has this rep and warranty insurance, and the claim comes in. What’s the process? How can they make sure that they can get this claim paid a favorable outcome?

Joe Finnerty: I think the first thing that has to happen, I’ve expressed this in a number of occasions on panels and when I’ve spoken to insureds. The lawyer who’s going to be most effective for an insured getting a claim paid, is the lawyer that instructs his or her client that they must freely provide information to the insurance company. If there’s any hesitation or any limitation on material information being provided, they can bet that it’s going to take longer because the insurance company is going to continue to ask for all the relevant information until they get it.

The way I’ve phrased on occasion is to say, “The zealous advocacy obligation of an attorney representing an insured in the world of reps and warranties, mandates that that insured lawyer tell its client to give up information as fast as they can to the insurer.” What we’ve done for various insurers in this context is organize a meeting at the very early stages because I think a conversation between people who are sophisticated about the claim and the insurance company that needs to get information is the best way to avoid the pitfalls that can happen sometimes in the context of claims handling by insurers.

Insurers think that they’re asking one big question that needs a simple answer. If it’s written down in a letter, sometimes it doesn’t get heard that way. It gets heard as a blunderbuss request from an insurance company that sounds very much like the stereotypes of insurance companies. If you have a meeting with people, they’re reasonably sophisticated about what the nature of the information that’s required, that exchange can happen much more effectively and much more simply. You get to a point where you know exactly what information is being requested and you provided much more quickly. The first stage in the process from my perspective is to organize that meeting. Then-

Patrick Stroth: Then after … So, that’s another real big myth-busting truth out there is that this process isn’t an adversarial process, policy holder versus insurance company is really a collaborative process. All you’re doing is, the objectives, let’s get the collaboration started, make sure they were all in the same page together.

Joe Finnerty: Precisely. Interestingly, this is a hybrid of the kinds of liability insurance that existed usually in the market before reps and warranties. Most policies in the market now are buy-side policy. The insured entity is the buyer of the company, not the seller of the company. The insurer is the insurer for the party that’s making the claim against the seller. In effect, it’s not a liability insurance policy. It is a first party insurance to the buyer.

What the buyer has to do is put together a proof of claim along the lines of other kinds of insurance where there’s a proof of claim where you’re just explaining to your insurer how you’ve been injured and how that exposure, that injury that you’ve gotten from a misrepresentation by the seller, has resulted in loss. All of the information is in the position of the insured, the buyer here, and all they need to do is open the doors and give that information to the insurer, and then the insurer will pay the claim. It’s not a situation where there’s an … Yeah, go ahead.

Patrick Stroth: I’m sorry, but the law says and the insurance company could bring in other outside experts, forensic accountants and so forth, and it’s not to find ways out of paying something, but it’s to better understand.

Joe Finnerty: That’s precisely it. We can get very deep into the complexity of the nature of claims that are made under these policies, but the essence of it is that at the heart and soul of a claim for a breach of a representation in a merger deal or in acquisition, is a claim that the seller in some way misrepresented the company that was purchased by the buyer. The quantification of that injury based on a misrepresentation, usually involves some element of the financial statements of that company that was transferred from the seller to the buyer.

The level of injury to the buyer usually is a quantification of the value of that company, and the value as represented in the purchase price, and the value of the company as delivered. That differential requires significant amount of sophisticated analysis from an accounting firm to understand how the earning power of that entity is different than it was represented. The quicker that everyone understands that level of sophistication that’s required, the faster information can be given to those experts and you can get a quantified loss.

Patrick Stroth: Are you seeing more claims or less than probably … It’s also a function there are more policies that are now being used. Have you seen a trend where a number of claims are going up and you’ve got the right key players? The process is getting smooth on the claim side?

Joe Finnerty: I think there are a greater volume of claims but I think that’s because there are greater volume of policies. I think the statistics as they have been collected by some of the more significant insurers and then certain brokers who have been involved in this market have indicated that there’s been a slight uptake in certain types of claims but the overall number of claims as a percentage of policies has not increased very significantly. It may be going up just a bit, but it’s not going up as a meaningful percentage when you’re thinking about the volume of policies as compared to the volume of policies sold.

Patrick Stroth: That makes it a stable product where the losses are just commensurate with the number of policies and so forth. It looks like it could be a real sustainable product for a good long time. You mentioned brokers in here, share with me what the role of an insurance broker is, other than the fact that you need one because these are highly regulated specialized products and a buyer can’t just go call an insurance company and get the policy. They need a broker. Tell me what the role of a broker is in a claim scenario?

Joe Finnerty: It’s critical. In many respect, the broker and the reps claim scenario is the facilitator of that meeting of the minds that I was suggesting at the most critical piece, at the front end. If the broker is smart and able, and sophisticated about the product as most veteran in this industry are, they will understand the requirements of the insurer to get the information required to assess the claim and quantify it if there’s a breach.

That process and the facilitation of the meeting of the minds is the heart and soul of getting a claim paid. The best brokers do that very effectively, and they don’t get in the way, but they are in fact the most, I would argue, the most important player at the early stages of a claim. It sets the tone of how information needs to be shared and explaining to a PE firm or a needy strategic company that feels that they have an insurance claim that should get paid.

Explaining to that person and in charge of getting the claim paid that the insurance company does legitimately require a lot of information in order to get the yes is a difficult thing. If that broker has a good relationship and can effectively convey that, it changes from night to day the experience that can be had by the insured and by the insurer.

Patrick Stroth: That’s fantastic. They’re very much a facilitator, getting the communication open and setting the tone, which I think from there makes a tough job a lot easier.

Joe Finnerty: That’s exactly right.

Patrick Stroth: Joe, what’s the number one piece of advice you give for people. I mean, the thing with mergers and acquisitions is people look out outside and says, “This company A buying company B.” It’s not really that. This is all comes down to people. Companies don’t make these decisions, people do. For people that are particularly in corporate development or other firms that are seeing this activity around this product with rep and warranty, what’s the number one piece of advice you’d give them as a non-insurance person? What you would tell them if they’re considering whether or not to insure their deal?

Joe Finnerty: I would say the most important advice is to be as open and clear-minded about what it is that you’re buying and the expectations that you can have at the back end. In other words, I would say understand that what you’re buying is an insurance product that will pay valid claims. Do not think it is just a basket of money that will be available to you if you’re disappointed in the purchase price and the purchase of the company that you bought.

I think one of the misnomers in the world out there is that when you buy an insurance policy, have a basket that just will take care of any problem including disappointment in the value of the company. It really only pays as a seller would only pay if there was in fact a misstatement or misrepresentation about the company. I will say that my experience is as compared to the early world when there was no insurance and the world now when there is insurance, if that insured entity, that buyer who has a problem with the company and there’s a misrepresentation, the likelihood that they will get paid faster and more cleanly, if they’re open and provide the information required is multiples better with insurance than it was when you have a seller who doesn’t want to admit that they said anything inaccurate in their representations.

In other words, an insurance company presented with evidence that there was a breach of representation, and that the company didn’t live up to something that was stated in the deal with alacrity pay, and come to a conclusion that it must pay much faster than a seller who is wedded to what they said and wants to defend the integrity of their statements in that deal. So, look forward to insurance companies willingly paying better and faster than sellers would ever have.

Patrick Stroth: Outstanding, outstanding. Did we miss anything? Anything that I forgot to ask you?

Joe Finnerty: I think you’ve summed up the world as it is. I think we hit the high points. Obviously, there’s a quite significant amount of detail that’s in the world surrounding the nature of these claims when they come, and it does require a lot of understanding and sophistication as I keep saying in order to get to yes.

Patrick Stroth: I think the best experts out are the ones with the experience where they’ve done from one deal to another. There’s a saying that there aren’t 50 deals. There are every deal is a separate entity in and of itself. The people that have been involved in handling these on a day-to-day basis, those are the go to people who can get you a favorable outcome and get you the help you need faster than anywhere else.

Joe Finnerty: That’s right.

Patrick Stroth: Now for our listeners out there, who may have some situations there. Maybe looking into this, how can they find you?

Joe Finnerty: Sure. I’m at DLA Piper’s offices in Rock Center in New York City, and my individual email is joseph.finnerty@dlapiper.com. My telephone number is 212-335-4800. That’s my direct line, 4800. Thank you.

Patrick Stroth: Okay. Fantastic. Joe, again appreciate you coming on and giving a perspective that a lot of people hadn’t heard ever before, so thanks again.

Joe Finnerty: Happy to do it. Thank you. Thank you Patrick.