Using Insurance Capital to Enhance Deal Terms and Mitigate Risk

White Paper

We all know the M&A world of today is much different from that of 10 or even 5 years ago, with blurred sector lines and perpetual disruption spurring many companies to find ways to stay ahead of their competitors.

"From my perspective, the M&A business is more complicated than it's ever been," says Chris Veber of Equity Risk Partners. "Folks are doing anything they can - both buyers and sellers - to get the competitive edge."

Below, Chris outlines two relatively new and innovative transactional insurance products being used to drive and support M&A activity - tax indemnity and litigation containment insurance - and the pros and cons behind it.

How it Works

Tax indemnity and litigation containment insurance begins with the premise that there's a known risk identified by either the buyer or the seller. The insurance company, knowing this is a sticking point between the two counter-parties, assumes the contingent liability for a premium, subject to a retention.

The Pros

  • Sellers get the money they need to proceed with the sale.
  • Sellers can purchase the policy ahead of the transaction to remove any uncertainty from the bargaining table - no one wants something unearthed during due diligence that might present noise during the sale process.
  • Buyers can purchase it to transfer any downside risk they view specific to that known issue.
  • Most insurers are willing to evaluate and issue an Indication of Interest with no upfront costs.

The Cons

  • The premium and non-refundable confirmatory due diligence fees associated with the insurance.
  • The insurance companies will force the policy buyer to assume a portion of the risk vis-à-vis a deductible. 
  • Certain issues will be excluded under the policy.
  • Putting the policy together could be labor intensive and will involve outside counsel - it might take one-two weeks to satisfy the insurance company's questions and data requests and to negotiate the custom policy.

Tax insurance policies typically cost between four and six percent of the limit of liability sought.  Common applications include the following issues: historical net operating losses, Subchapter S corp status, transfer pricing, nexus and various tax credits.  On the other hand, insurers generally entertain pending litigation opportunities involving: alleged breach of contract, alleged patent, trademark or intellectual property matters or various other types of litigation.  In our experience, the one-time premium payment for a litigation containment policy costs between six and ten percent of the limit of liability purchased subject to a self-insured retention of $500,000 or more and policy term of five to seven years.

chris veberChris Veber - Executive Vice President 

Chris Veber contributes over 20 years of experience in mergers and acquisitions. He has led insurance and benefit consulting teams that provide advice to over 30 top private equity firms.

In 2012 and 2013, Mr. Veber was named a Power Broker by Risk & Insurance Magazine in the Finance - Private Equity category. 

Prior to joining Equity Risk Partners, Mr. Veber was an investment banker with McDonald Investments where he advised the firm's corporate finance clients in Chicago and the Upper Midwest. Mr. Veber is a graduate of The University of Michigan where he earned his bachelor's degree in economics and was a member of the 1995 NCAA National Championship Swimming and Diving Team.

Contact Information:
Phone: (312) 980-7856

originalMichael Marcon - President, HUB International and Founder, Equity Risk Partners

Michael Marcon has more than 30 years of insurance experience, pioneering the delivery of insurance due diligence to private equity firms and specializing in alternative risk financing and transactional insurance products. Before launching Equity Risk Partners, Mr. Marcon was Executive Vice President of Aon Risk Services - Mergers and Acquisitions Group and he was instrumental in creating the Private Equity practice for Aon's predecessor company, Rollins Hudig Hall. He served as Regional Manager - Finance for Transamerica Corporation, as well as positions in Special Risk Financial and Capital Management for CIGNA Corporation. 

Mr. Marcon holds an undergraduate degree in economics from Ursinus College (where he was the former chairman of the board of trustees) and an MBA in finance from Drexel University. Mr. Marcon tweets from @mcm7464 and can also be reached through his blog, Michael Marcon Tweets, where he writes about business, tradition, and life. 

Contact Information:
Phone: (415) 874-7101