Aon Notes M&A Activity Produces Increased Warranty Claims

A bulletin from Aon’s London office concerning mergers and acquisitions states that “sellers are facing a new hurdle as buyers are increasingly seeking to recover damages for financial discrepancies on the cusp of completion.” Aon said there had been a “60 percent increase in inquiries for warranty and indemnity (W&I) insurance as a seller’s weapon in a buyers’ market.”

Aon also noted that with “both private equity (PE) and corporate buyers feeling the pinch, the current trend for W&I claims for accounts and tax discrepancies will continue, but the number will undoubtedly rise. Buyers are looking at areas where they can recoup some of the purchase price through a warranty claim, be it over accounts, litigation, employees or stock. In particular, claims are being brought after signing but before completion (after the insurance has been taken out) which sellers are feeling is an attempt to reduce purchase prices. Sellers are now looking at how insurance options can secure the deal with minimal cost.”

Aon explained that a W&I policy can “support the seller in the following scenarios in today’s economic downturn, as follows:
- PE sellers may be forced to give warranties to ensure a sustainable sale price but can insure that liability to release funds to investors.
- Buyers concerned about the financial worth of the seller’s covenant during a distressed sale can opt for a contingent insurance policy if the seller defaults.
- The funding bank requires greater warranty protection than previously expected so a buyer policy can be arranged to sit above the seller’s indemnity cap.
- A selling liquidator may only give very limited warranties (in time or extent). Insurers will now consider cover for buyers to extend both time and breadth for additional comfort.

Anka Taylor, director of Aon’s transaction liability unit, commented: “Never before has the M&A community been more in need of every strategic tool available to get deals done. Deals that could create real value are frequently blocked for reasons that do not reflect their underlying worth. Insurance products cannot solve the myriad of economic issues that we now face but it may be worth having a look at them in a fresh light to see if they can assist you in getting that deal over the line.”

Source: Aon – www.aon.com