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ARC: HOW MID-MARKET COMPANIES CAN GUARD AGAINST MERGER AND ACQUISITION RISKS

Transactional risk insurance products can help mid-market buyers, sellers

Transactional Risk Insurance Products

Introduced in the late 1990s, transactional risk insurance products have increased in popularity in recent years, especially among middle-market companies averse to assuming unfunded liabilities as part of a merger or acquisition, industry experts say.

Today's transactional risk products provide broader coverage and more favorable terms, competitive pricing and a streamlined underwriting process, these experts say. Premiums range from 2% to 4% of limits, with deductibles set at 1% to 3% of transaction value, depending on the severity of the exposures contemplated. The insurance market currently can provide aggregate limits of up to $200 million per transaction.

Although transactional risk insurance policies are issued at the closing of a deal, the underwriting process usually begins several weeks before. They are manuscript policies that can be structured from either a buyer's or seller's perspective. Underwriters, often with legal backgrounds, get copies of all documents related to the transaction and conduct conference calls addressing all of the potential exposures identified. Diligence fees ranging from $15,000 to $25,000 are charged as part of the underwriting process.

The most common types of transactional risk insurance products are:

• Representations and warranties insurance, which provides coverage for financial loss associated with an unintentional breach in a representation or warranty within the executed purchase agreement.

• Tax liability insurance, which provides coverage for unpaid taxes, interest and penalties incurred by a taxing authority.

• Legal contingency insurance, which covers successor liability exposures and contract issues.

• Environmental liability insurance, which provides both first-party remediation and cost cap coverage for pre-existing, known conditions and pre-existing unknown conditions, as well as third-party liability coverage.

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