The typical insurance broker wants to serve all their clients’ needs, especially if it’s a large client that requires various types of insurance to cover its operations.
The motivation is to be there for the client, who you know well. And the extra commission doesn’t hurt either.
But although a broker may have the best intentions, if the insurance required is out of the broker’s area of expertise (and no broker is master of all), this practice is actually not good for clients. They’re just not going to get the best value out of their policy.
When it comes to Representations and Warranty (R&W) insurance, a highly specialized variety that covers M&A deals, this is definitely the case.
R&W insurance protects both Buyer and Seller if there is a financial loss resulting from a breach of the Seller’s representations that were outlined in a purchase-sale agreement.
If there is a breach, the insurer covers the losses because the coverage transfers the indemnity obligation from the Seller.
Buyers and Sellers entering into deals who are interested in one of these policies need a broker who specializes in R&W insurance and does it routinely. Not to mention that the broker must understand how M&A works.
In R&W insurance, it’s not what you know, it’s what you don’t know that will come back to bite you.
Here’s why: On the surface, the coverages from one R&W policy to another are very similar. It’s rare when R&W insurance policy verbiage diverges greatly and have material coverage missing, which often happens with other types of business insurance. Within various business insurance programs, many coverages considered “essential” by some are deemed “optional” by others and therefore omitted to save costs (i.e. Uninsured/Underinsured Motorists coverage).
The scope of coverage for an R&W policy is determined by two elements: The Seller’s reps and the degree to which the Buyer performed diligence on those reps.
The key difference between R&W policies comes from decisions Underwriters make as to what degree they’re willing to cover all or most of the Seller’s warranties. This decision is based on two elements: The Underwriters’ appetite for risk in a certain business sector and the amount of diligence performed by the Buyer. It’s essential for the insurance broker to determine to what extent each insurer is willing to cover the majority of warranties, and where there may be flexibility.
Unlike other instances when business insurance is considered, R&W is brought to bear in M&A transactions where 100’s of millions are at stake. That’s both exhilarating and terrifying for the parties. Often times, Buyers and Sellers haven’t used R&W before, so they have no idea what to expect from the process. They need a “steady hand” to guide them, manage their expectations and inform them as to what they can expect.
Brokers who lack experience in placing R&W will struggle to navigate the underwriting process. Ultimately, this can put their clients through unnecessary stress due to delays and “surprises” that an experienced player can anticipate and prepare for.
An example would be to prepare Buyers for the time and access Underwriters will need with the Buyer’s team to review the diligence performed and which outside parties participated. Brokers unfamiliar with R&W might fail to prepare their clients for this, which can result in a huge burden on the Buyer.
A broker’s relationships with Underwriters at different insurance companies is essential. Different insurers have different appetites for risk. A qualified broker, who are also experienced with M&A, knows who does what.
Some insurers are comfortable with healthcare deals and the added regulatory scrutiny they bring.
Some insurers are comfortable in the up-and-coming cannabis market. (Actually, there’s only one insurer in this market so far, but more will ultimately follow.)
Some insurers will cover certain deals but only with so many strings attached that the client won’t actually qualify, or the cost will be too high.
Insurance companies’ appetite for certain risks can change over time, and a savvy broker will keep track of these trends.
R&W policies cover complex business deals – and the Underwriters typically don’t know every industry well. That’s where the broker comes in to match the right Underwriter with experience – and interest – in a certain space for the deal.
A good broker/Underwriter relationship has other benefits.
First, a good broker sends information the Underwriters need without waiting for them to ask. That means coverage is obtained that much more quickly.
Just like anything in life, when you know someone, things just go smoother. This is particularly true on smaller deals, in which Underwriters have to deal with less due diligence provided by the Buyer.
Some insurers will penalize the Buyer for having less comprehensive due diligence. But a good broker can be a go-between and mediate in that case.
For example, say the financial statements were reviewed but not officially audited. The broker can explain why that was the case and why it’s okay. A trusted relationship makes it possible.
Typically, both Buyers and Sellers have their own brokers handling their respective insurance programs. When those brokers see the premium sizes (and the resulting commission) from R&W policies for big deals they say, “Sign me up.” They’re not qualified, but they’re certainly not leaving that money on the table and are willing to dabble if given the chance. This creates unnecessary friction between the parties as they argue on behalf of their “guy” or “gal”.
The best approach is to select an independent specialist who will only handle the R&W placement. There would be “zero conflict” with the incumbent brokers as R&W is a one-time deal that doesn’t touch any other policy.
That neutral broker will have a fiduciary responsibility to the Buyer (R&W policyholder) to provide the broadest level of protection, while committed to delivering a variety of options that are budget appropriate in the interests of the Seller (who often shares in the cost of R&W).
That’s why a neutral broker who knows R&W best practices and has the clients’ best interest at heart will get the ideal outcome for both sides.
There’s no shortcut for a broker who has experience and has had working relationships with Underwriters for years. With that comes mutual respect. If there are disagreements or contentious points, they are easier to work through.
In an M&A deal, Buyers and Sellers should not rely on a broker who does their other insurance to secure their R&W policy. Get a specialist.
A number of Underwriters have already “trained” me. I know the inside track. They know I’ll run the process the way they need to provide the best policy in a timely manner.
I’d be happy to discuss with you how Representations and Warranty insurance could benefit your next M&A deal, as well as the costs. Please contact me, Patrick Stroth, at firstname.lastname@example.org or 415-806-2356.
You’ve seen the commercials on TV.
You visit a website and easily apply for insurance for your home or car, getting quotes from multiple companies at the same time. Some types of health insurance even work like this.
The advantage of these online marketplaces is you don’t have to go through the time-consuming process of calling or visiting an agent to get your policy… who might even try to upsell you on other services. It can be a real chore.
I have no problem with this so-called “insurtech” when it’s used to secure these relatively simple types of “consumer” insurance faster and easier.
When it comes to any sort of insurance product with the least bit of complexity, however, insurtech should be just a first step to give you a ballpark idea of what’s out there.
And, you need an expert helping you in person when you go beyond this Step 1 to ensure you get the coverage you need.
Take the popular online legal services website, LegalZoom. They make it super easy to set up articles of incorporation. But if you’re a startup looking to attract serious investors, doing so would lose you all credibility. And you couldn’t be certain your business was structured correctly.
With insurance, you could potentially go “DIY” and try to do your own research to figure out which option is best for you as far as type of policy and level of coverage. But if something goes wrong down the line and you discover a certain risk isn’t covered, it’s all on you.
You could sue the insurance company but… good luck there.
You need an expert who does this for a living and knows specialized types of insurance like Representations and Warranty (R&W), which covers M&A transactions, as well as Directors and Officers liability insurance, Cyber Security insurance, and more, inside and out.
If you deal with a broker, you not only have an expert to answer questions. The broker is also accountable. By law, they have a fiduciary responsibility to look after your best interests. If they make a mistake, you have someone to go after.
These brokers may not be available 24/7 like an online marketplace, but they have the specific information you need and the answers to your complicated questions, backed up by years of experience dealing with these issues every day. That peace of mind is priceless when so much money is on the line.
And, speaking of money, the difference in what you’ll pay in fees for an online marketplace versus an in-person broker is not as much as you might think. A bargain compared to the millions of dollars that change hands in a typical M&A deal.
When you use a broker, you get responsiveness and expert-level input to make sure you get the right policy.
Let’s use an example from the auto insurance world.
On-line auto policies provide Liability and coverage for physical damage to the car (Comprehensive/Collision coverage), which most buyers understand. To keep costs down, buyers only select the coverages they think they need at the lowest Limit possible to comply with the law.
The danger, is these “optional” coverages purchased at levels solely dictated by price, can leave drivers seriously unprotected.
In the case of Uninsured motorists – a driver will be left paying his medical bills and those of his passengers if his car is struck by someone with little or no insurance (think drunk driver).
Worse is when young adults (the “m-word”) living in their parents’ home purchase a tiny amount of insurance thinking they have no net worth at risk. They later find a court will likely allow attorneys to pursue their parents’ home for compensation because of their residence – so the house is “fair game”.
This is no problem when there is a savvy broker involved. They’ll ask the questions necessary to understand what’s at stake and they can provide complete explanations of coverage, so buyers can make an informed decision.
When it comes to complex insurance like Directors and Officers liability and R&W, only where the needs are very simple can I say that insurtech is the way to secure a policy.
The vast majority of situations and transactions are much too complex. In the case of R&W insurance, this coverage is intimately intertwined with an M&A deal and is a major component of the negotiations. Underwriters need quite a bit of information before they’re confident in writing your policy. That’s not something you can handle online.
In these cases, you need someone on your team who can put together a “patchwork” of different coverages and policies so there are no gaps… and no overlapping that causes you to pay too much.
The layman can’t read through the policies to figure that out on their own. This complexity is why brokers are licensed and regulated.
If you’re looking at securing a specialized type of insurance like Representations and Warranty, Directors and Officers liability, or Cyber Security, bypass the online portals and talk with an expert.
I’m happy to jump on the phone or answer your questions by email. You can reach me at (650) 931-2321 or email@example.com.
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