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Blogs - The M&A Perspective

M&A Insurance - An Alternative to Traditional Risk Allocation between Seller and Purchaser

29.07.2015 – After a rather sluggish start in the past, M&A warranty insurance seems to now be rapidly gaining momentum and acceptance in the M&A practice in the US and Europe. The insurers have professionalized their offering by having lawyers with deal experience in charge, by streamlining their quoting and due diligence processes to keep up with the pace of the transaction, and by adapting their pricing to what the market is actually willing to pay in exchange for the "outsourcing" of some transactional risks.

Some deal lawyers already praise M&A insurance as the panacea for any deadlock in warranty negotiations. Others dread it as Pandora's box suggesting that relying on M&A insurance influences the parties' behavior, because being insured creates moral hazard: Parties might not be interested in investing sufficient resources in appropriate due diligence or negotiating hard on representations and warranties and indemnities, but rather they rely on the insurance coverage. There seems to be some truth to both statements: On the one hand, M&A insurance may not be appropriate in every deal for every possible risk as it adds cost and complexity to the deal; also, the market will only be able to render its final assessment as to whether it is really fit for purpose after some actual insurance claims have been raised and handled to the satisfaction of the deal parties (and their lawyers). On the other hand, the M&A insurance route has become an attractive alternative to the traditional risk allocation between seller and purchaser which in a given case is well worth exploring. As such, every M&A practitioner needs to add it to his/her toolbox.