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Due diligence mandatory for M&A coverage

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A “due diligence” review is a core requirement for buyers of representations and warranties insurance.

Purchasing this type of insurance requires a thorough review of the target company’s operations and financial statements, experts say.

“One of the things underwriters really focus on is the diligence process,” said Stephanie Hyde, executive director of PE Risk, a New York-based risk and insurance consulting firm, and previously a managing director at Morgan Stanley.

Buyers must report their diligence findings to bind coverage.

“One of the things the reps and warranties process is contingent upon is buyers doing their diligence and presenting a diligence report,” Ms. Hyde said.

The diligence process associated with transactional risk insurance can make negotiations easier between the buyer and the seller, according to Brian Hamilton, New York-based partner in the mergers and acquisitions group with Sullivan & Cromwell L.L.P. The buyer does due diligence with full access from the seller and the two sides develop a set of representations and warranties in the agreement for the transaction, Mr. Hamilton said.

Emerging risks such as cyber present fresh challenges to the R&W market and may require additional examination during the diligence review.

“More and more often, depending on the industry we’re looking at with the target company, if there’s a cyber exposure there, the carriers like to see a cyber diligence report addressing these issues,” Ms. Hyde said.

 

 

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