Transactions involving mergers and acquisitions are becoming increasingly secured
Italy has joined the global trend of using insurance solutions to manage risks in merger and acquisition (M&A) deals. According to Andrea Foti, EMEA Chief Commercial Officer M&A of Aon, companies are increasingly protecting themselves by transferring specific risks to the insurance market [6].
In the realm of M&A, two types of insurance policies have emerged as essential tools: Representations and Warranties Insurance (RWI) and Tax Liability Insurance.
Representations and Warranties Insurance (RWI) provides a safety net for buyers against losses from breaches of contract representations made by sellers. This insurance covers unknown or undisclosed risks related to tax liabilities and litigation claims, allowing buyers to rely on a reputable insurer to cover potential breaches rather than requiring sellers to offer extensive indemnities or escrow funds [1][4]. RWI policies typically provide coverage periods much longer than traditional indemnities, extending up to six or seven years for fundamental tax representations, offering prolonged financial security during post-deal integration [1].
On the other hand, Tax Liability Insurance provides coverage for known tax risks where residual uncertainty remains despite expert advice. This insurance is particularly valuable when tax laws are complex or evolving, or when private rulings are unattainable, helping buyers avoid costly escrow negotiations or self-insuring unknown tax positions. Sellers benefit by gaining protection from future claims related to these tax liabilities [2].
In litigation contexts, these policies can cover risks arising from ongoing or potential disputes inherited from the target company, such as unsettled debts, contractual breaches, regulatory violations, or intellectual property disputes. By insuring these risks, parties avoid transferring contingent legal liabilities to buyers, reducing negotiation friction and potential deal failure [5].
These insurance products enable buyers and sellers to mitigate financial exposure from unforeseen or residual tax and litigation liabilities, simplify negotiations by reducing the need for complex indemnities or escrows, increase deal certainty and speed by providing a secure financial backstop, and support post-transaction integration by allowing buyers to focus on growth rather than contingent risks [1][2][4][5].
The growth of the Tax & Litigation insurance market follows that of warranty and indemnity policies. In recent years, there has been a global increase in the use of insurance solutions in M&A deals. Tax insurance policies offer quick operation, according to Aon [3].
Genta Hysi, Head of Southern Europe M&A of Aon, explains that the Warranty & Indemnity ("W&I") policy is the most rapidly spreading product among professionals and sector operators [7]. Litigation policies, like tax policies, allow funds that would otherwise be frozen to be freed up and used for other purposes without resorting to external financing.
Risks linked to known fact patterns, such as tax issues and litigations found during the due diligence phase, can significantly impact M&A operations. By transferring these risks to the insurance market, parties can navigate M&A deals more smoothly and predictably.
References: [1] Aon (2021). Risk Solutions: Tax and Litigation Insurance [2] Aon (2021). Risk Solutions: Tax Liability Insurance [3] Aon (2021). Risk Solutions: Tax Insurance [4] Aon (2021). Risk Solutions: Representations and Warranties Insurance [5] Aon (2021). Risk Solutions: Litigation Insurance [6] Aon (2021). Aon's Andrea Foti on the growing use of insurance solutions in M&A deals [7] Aon (2021). Aon's Genta Hysi on the rapid spread of warranty and indemnity insurance
In the realm of merger and acquisition (M&A) deals, companies are increasingly utilizing insurance solutions to manage risks, such as Representations and Warranties Insurance (RWI) and Tax Liability Insurance, for protecting their financial investments. RWI provides a safety net for buyers shielding them from losses due to breaches of contract representations made by sellers, including unknown or undisclosed risks related to tax liabilities and litigation claims.
As Italy joins the global trend in employing insurance solutions in M&A deals, these insurance products can enable a smoother and more predictable negotiation process by transferring known risks including tax issues and litigations to the insurance market, ensuring better financial security during the post-deal integration period.
