An experienced dealmaker can probably offer a long list of risks that need to be mitigated to close a deal. Regulatory hurdles, financing issues, valuation errors and litigation risks are usually the top priorities for any dealmaker. But adequate insurance coverage is too mundane to be on the radar.
This blind spot could be expensive for the entire industry. According to a report from Liberty Global Transaction Solutions (GTS), part of Liberty Mutual Insurance, “There has been a significant increase in third-party claims,” related to global M&A transactions completed in 2022. “Especially in the Americas.” Instances of multiple claims being made on the same M&A insurance policy have also increased from 10 percent in 2019 to 24.5 percent in 2022, according to the report.
To reduce claims and ensure adequate coverage, private equity firms and dealmakers need to have conversations with their service providers before the deal is even on the table. Doing so could save time and money, according to Amy Gross, SVP & global practice leader, private equity and mergers & acquisitions at Liberty Mutual.
“Having conversations early-on with your insurance partners is how you can avoid issues in the future,” says Gross. “And there can be a lot of different issues. One is that the insurance carrier isn’t fit to grow with you. So you get into a position where the insurance carrier just cannot provide coverage, maybe in a state or a jurisdiction that you’re making an acquisition, and you outgrow them.”
“I’ve seen deals not close on time. So yes, that’s an issue,” says Gross. “They [PE firms] get a deal done and suddenly their carrier partner can’t work with them on it. Then it’s a huge challenge for them to find somebody to work with them.”
Gross has also seen instances of companies being unaware that their firm’s policy doesn’t necessarily offer coverage for operational risks, such as worker’s compensation, for their add-on acquisitions. “We’ve had clients that don’t tell us about acquisitions, and then an employee reports a claim and we say it’s not covered,” she explains. “A lot of times, we can work with our clients and go back and figure out that there is coverage, but it’s really frustrating for that employee. Then they’re going out and getting an attorney. One, that becomes more expensive and two, it just creates a problem for the culture of that company.”
Coverage for M&A deals has become more popular in recent years. 9,178 M&A transactions were covered by insurance last year, according to a report by insurance broker BMS Group. That’s 45 percent higher than in 2020. Four out of every five private equity transactions now feature some form of insurance, according to the BMS’ Private Equity, M&A and Tax 2023 Report.
Gross explains that Liberty Mutual’s policy is to have frequent follow-ups with their clients about the industries, jurisdictions, and size of acquisitions they’re likely to pursue every year to set the groundwork for such deals in advance. “Having a very upfront conversation will absolutely speed up the process because nobody’s surprised when there are acquisitions happening,” she says.
–Vishesh Raisinghani
