Make It Someone Else’s Problem: Allocating Risk In M&A Transactions Through Insurance

During the course of an M&A transaction, it is often the case that the most hotly negotiated aspects of a purchase agreement are the representations and warranties and related indemnities. This is not surprising as these are the key devices used to address allocation of risk as between the parties, and by extension, price. While buyers want the security and protection of knowing they paid for what they thought they were buying (essentially minimizing surprises post-closing), sellers often desire a clean exit from the transaction. Parsing though these competing objectives can be time consuming, costly and may hinder a deal.

One possible option is to introduce a third party to share in the risk burden by way of insurance. Many insurance companies offer transactional insurance products such as representation and warranty insurance, tax liability insurance, contingent liability insurance and litigation buyout insurance and its use is becoming more prevalent in the