This content is independent of any content coming from insurance brokers, insurers, law firms, or other insurance lobbyists. Commercial insurance is rarely taught in schools, and when it is, it’s mostly done through the lens of brokers or insurers. There are many misconceptions around Transactional Liability Insurance, like many other topics in commercial insurance, due to bad habits acquired through the over reliance on insurance brokers or insurers or information providers who are lobbied by them. It is also important to note that insurance has both an operational aspect and a legal aspect, on which we put weights of 95% and 5% respectively in terms of importance to protecting a business and its investors (the point is that going to court to enforce coverage defeats the purpose of buying insurance, so you want to make sure that whatever insurance you buy protects your business right and pays out fast on large losses).
It is a form of Liability Risk that originates from a specific transaction or project. Most often times, the term is used in relation to mergers and acquisitions, but the technical sense of the term can be used to any type of transaction. Causes of transactional liability would be the same as those that cause Liability Risk in general, which entails a specific risk materializing leading to financial loss to one or more parties to the transaction. Such parties would then turn to litigation as a means to recoup their losses accordingly. Operational Risk is the core risk that prompts liability.
Transactional Liability Insurance
It is a form of commercial insurance specifically for mergers and acquisitions whereby the insurance would protect the Buyer from a Seller’s breach of any representations or warranties made within the purchase agreement, all while providing liquidity to the Seller by releasing escrow capital. There are other mechanics relating to this type of insurance, which is also called rep and warranty (R&W) insurance or M&A insurance. For more information, you can read our article on rep and warranty insurance.
Transactional Liability Insurance Company
There are various insurers who offer transactional liability insurance including global household names such as Chubb, AIG, Liberty, Lloyd’s, etc. Some countries such as the US and the EU have access to a wider range of insurers. Our team can assist you find the right insurance broker and company for transactional liability insurance.
Details of Transactional Liability Insurance
If you are looking for more technical details around cost, coverage, procurement, etc., more information is available on our article on rep and warranty insurance, which is essentially the same insurance as transactional liability insurance yet named differently.
There are 3 main steps in procuring transactional liability insurance. A risk advisor independent of brokers and insurers must be involved from start to finish:
- Quote(s) presentation -- these are summaries presented by the insurance broker outlining the premium, deductible, exclusions, areas of heightened underwriting risk, and other terms.
- Insurer selection -- this is the formal selection of a specific insurance company to offer the insurance. At this point the buyer would commit to the underwriting fee payable to the insurance company. The underwriting fee is used for corporate lawyer fees who are involved in the underwriting process.
- Contract negotiation and binding -- as the underwriting of the insurance progresses, which includes an underwriting call with the deal team alongside access to the data room, a draft policy will be produced. This policy can be negotiated and reworded to arrive at the desired policy wording. It is very important for the policy to be reworded to match the operational risk of the deal at hand, or else the buyer risks getting insurance with a low payout ratio and one that is irrelevant to the operational data of the deal. Once the final version of the policy is produced, the buyer can formally bind the coverage for it to be effective and pay the corresponding premium.