This Gibson Dunn memo reviews how the Covid-19 crisis is affecting the market for R&W insurance, and considers how the crisis may influence the market over the longer term. The memo says that insurers are insisting upon robust Covid-19 related due diligence, and are likely to focus increasing attention on the reps & warranties and pre-closing covenants and conditions potentially implicated by the crisis:
Additionally, we expect that insurers will be particularly focused on certain representations in acquisition agreements (and the related disclosure schedules) that are more likely to be impacted by the pandemic—such as representations regarding customer and supplier relationships, accounts receivable, absence of changes to the target’s business, undisclosed liabilities, financial statements adequately presenting the target’s financial condition, employees, compliance with laws and adequacy of insurance—and insurers will expect to see that buyers have tailored their diligence to confirm the accuracy of those representations.
Insurers have also focused on how the parties have allocated COVID-19 related risks in the acquisition agreement (either explicitly or implicitly) between signing and closing and the related closing conditions. Prior to the pandemic, buyers had largely accepted very narrow closing conditions under which they could only terminate in the event of a “Material Adverse Effect” (which itself was narrowly defined). Insurers are particularly sensitive to efforts of the parties to shift this deal risk to the insurers and generally prefer to see the issue explicitly addressed.
The memo says that insurers are also proposing exclusions for coverage for some COVID-19 related risks even in the absence of specific COVID-19 due diligence issues – and that the breadth of these exclusions is changing on a daily basis.
The memo speculates that the likely increase in distressed transactions will keep demand for R&W insurance high during the short-term, but outside of those transactions, changing marketplace dynamics – such as an increase in buyer leverage – may result in greater reliance on seller indemnities backed by substantial escrows.
– John Jenkins