Transactional risk insurance is coverage designed to safeguard the seller’s liability or protect the buyer from any breaches that occur under the sale agreement in a transaction. Specifically, this insurance policy is used to protect or mitigate two types of risks that typically arise from M&A transactions and potentially stand-alone tax matters:

1. Unknown and Unforeseen Loss

These losses can be safeguarded with representations & warranties insurance (warranties & indemnities insurance), a policy designed to supplement or replace seller indemnity. Our experienced team of representations & warranties insurance brokers skillfully manages transactions by identifying potential issues and ensuring deals close on time with maximum value.

2. Identified and Known Risks

These are typically identified tax issues or could encapsulate other contingent risks. They can be wrapped around indemnities or be standalone policies, possibly attaching to the target. These risks are non-M&A drivers.

Transactional insurance is used to cover the following operational exposures:

• Representations & Warranties (R&W): In the event of undisclosed liabilities and exposures in a transaction, R&W insurance safeguards buyers from financial losses and reduces the seller’s liability exposure.
• Tax Liabilities: Tax insurance eliminates prolonged negotiation times and post-closing adversarial proceedings between parties.
• Contingent Liabilities: Transaction insurance protects against contingent liabilities, such as lawsuits pending judgment and tax disputes under review.
• Litigation Buyout: Litigation insurance is routinely procured to transfer legal exposure out of the M&A deal to an A-rated carrier.
• Asbestos Risk Transfer: If the seller has undisclosed asbestos liabilities, such as third-party claims for injuries related to occupational exposures, transactional insurance can provide coverage for claims.
• Liquidated Damages/Fund Closure: If a seller breaches the contract, a liquidated damages provision ensures the buyer receives a pre-specified sum to cover the damages.
• Loss Portfolio Transfer: Companies that have inherited large portfolios of claims may transfer these liabilities from one insurer to another to clean their balance sheet and mitigate future liabilities.
• Environmental Liability: Transaction liability insurance can help cover environmental liabilities, like pollution risks, acquired from a sales agreement.
• Patent Infringement/Intellectual Property: Coverage for patent infringement exposures and intellectual property breaches can save your business significant funds on legal fees and settlements.
• Key Person Coverage Placement: If the loss of an executive or other key individual of an acquired company occurs, this type of transaction insurance provides assurance to buyers that the business can continue operations without disruption.

Transactional risk insurance is necessary for both buyers and sellers involved in mergers and acquisitions. and provides several benefits to both parties:

Benefits for Buyers

• The buyer is able to mitigate any risks associated with potential breaches of representations and warranties by the seller in a sales agreement.
• The buyer receives financial protection against unexpected exposures that may arise after the deal has been closed.
• The buyer is able to agree to limiting the seller’s liability for breaches of representations and warranties, which helps buyers win deals and facilitates smoother negotiations with the seller.
• The buyer avoids adversarial proceedings with the seller after closing.

Benefits for Sellers

• Potential post-closing liability under the sale agreement is minimized for the seller.
• Negotiation times and attorney expenses are decreased, thus facilitating a clean exit for the seller and a quicker close for a deal.
• The seller can avoid tying up funds in escrow for years post-closing, which allows for a greater return to investors and/or more capital available for new investments.