What is your experience of the most common insurance claims on historic deals, or transactions where insurance would have helped the M&A process? Examples provided.

Insurance helps generally across all transactions because it really simplifies the negotiations of contract terms with the counterpart. It is a facilitation tool that eases the negotiation process, and we have used it to cover potential negligence in reporting on financial contracts or compliance breaches.

It is commonly used where the parties represent and warrant that the contract terms have always been complied with, and this is of key importance for the continuation of the business that is being bought.

Tax liability is a recurrent point in a transaction, where the use of W&I insurance cover may be of help in reaching common agreement between the seller and the buyer. In particular, the buyer always requests that tax liabilities be actionable vis-à-vis the seller until the date on which the overall statute of limitations for such tax liabilities finally expires, in compliance with the Italian applicable legislation.

Conversely, the seller often offers to the buyer the comfort of W&I insurance cover as a bargain for exchange, in order to replace the ordinary statute of limitations with the shorter contractual term after which the buyer is prevented from claiming tax liability vis-à-vis the seller. Usual practice, to this end, is for the seller to attempt negotiating a two year reduced contractual term, compared to the five or six-year statute of limitations provided for by Italian applicable laws.

The use of W&I insurance cover, however, faces some limitations under Italian laws. In fact, there is a peculiarity of the Italian legal system under which contingent liability arising from the valuation processes on company assets, or capital losses arising from the same valuation process, cannot be covered by M&A insurance. In addition, although tax contingent liabilities may be covered by W&I insurance, indemnification from penalties or sanctions arising from tax liabilities are not covered.

Finally, Italian laws state that claims resulting from the misconduct or gross negligence of the insured party cannot be covered, meaning the insurance company will refuse to process the claim.

When the insurance backs up the liability of the seller, the buyer takes benefit from the strength and financial solidity of the insurance company, which becomes his debtor should contingent liability arise. The seller, conversely, is inclined to provide an insurance cover in order to comfortably walk away from the closing table, particularly if the same sells the entire business, without fearing future reduction of the proceeds received as a result of the closing of the transaction.

When insurance cover is put in place, the seller will always try to negotiate down the overall maximum cap of his liability, leaving the remaining part in the hands of the insurance cover. That induces the buyer to claim through litigation any liability that is connected with the deal.

Comments by Lorenzo Bacciardi as part of the M&A Working Group Virtual Series publication titled ‘Slaying Uncertainty Assessing the contribution of insurance to the M&A process’. To read in full please click here.