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Transactional Liability Insurance Bridges Gap Between Buyer, Seller

Jeffrey Schwab January 25, 2016

It’s no secret that whether you are the buyer or seller, protecting yourself from the chaos of unforeseen liabilities should be of utmost priority. Fortunately, a number of carriers offer transactional liability insurance products.

Transactional insurance is a collection of products including representations and warranties, tax liability, pollution and contingent liability.

These products can be used to distinguish a bid and bridge the gaps that arise between buyers and sellers. Sellers seek to minimize indemnities and survival periods, while the buyers want to maximize the escrows and extend the representation period.

  • A representations and warranties policy is designed to protect an individual from a financial loss that occurs because of a contractual breach of representation — statements of previous and existing factual information – and warranties – the promise that future facts and information will be accurate. These policies are designed to mirror the asset purchase agreement or sales and purchase agreement.
  • Tax liability policies address known tax positions taken by the seller and can also cover transaction-related tax positions. The IRS may place a lien on assets at the time of sale for unpaid federal taxes. Federal tax liability for unpaid taxes may result in the IRS placing a lien on assets at the time of sale. State and local tax issues may arise depending on the jurisdiction. A tax policy minimizes or diminishes these concerns.
  • Contingent liability stems from an issue identified during due diligence that could lead to financial loss post-closing. This often arises because of litigation or potential litigation, and both the buyer and seller have to properly valuate the risk. A contingent liability policy removes this exposure from the transaction.

Keep in mind, unplanned liabilities can affect both sides of the transaction. In general, underwriters will require both buyers and sellers to have “skin in the game” relative to the policy structure. While there is a minimum policy premium plus due diligence fees, in the end both will benefit from streamlined negotiations and more confident transactions.

Look for a solid broker with a dedicated M&A practice and the right carrier markets.

Seasoned professionals can help both buyers and sellers navigate to the most appropriate transactional product, which helps you to increase your close success rate by removing a deal’s intrinsic uncertainties.

Jeffrey Schwab is senior vice president and practice leader of the Mergers & Acquisitions/Private Equity Practice at Oswald Cos. Contact him at 216-658-5208.