DealLawyers.com Blog

Traditionally, RWI insurers haven’t focused a lot of attention on a buyer’s due diligence investigation into the condition of the target’s assets.  Insurers have generally operated under the assumption that buyers were conducting adequate due diligence investigations and that, in any event, condition of assets claims were unlikely to result in big losses to the carriers.  According to this WTW blog, that’s no longer the case. This excerpt explains what’s changed – and why:

Over the past several years, the RWI market has absorbed some high‑severity claims tied to undisclosed or poorly understood asset‑condition issues. These have included:

• Deferred maintenance and capex backlogs
• Equipment failures shortly after closing
• Systemic issues across multi‑site operations
• Deficiencies in maintenance practices or asset‑tracking systems
• Failures of highly technical or mission‑critical assets

 

These losses revealed a gap between what underwriters assumed buyers were doing and what diligence was actually being performed. In response, RWI insurers recalibrated their expectations. Buyers now encounter:

• More detailed underwriting questions focused on physical assets, including historical maintenance and investment in capex
• Heightened scrutiny of who performed the diligence and what their qualifications were
• Requests for written technical or engineering reports
• Narrower coverage positions when diligence is deemed insufficient or material issues are identified

 

The result is a more rigorous underwriting process in which asset‑condition risk is no longer treated as an afterthought.

The blog goes on to say that insurers now expect buyers to demonstrate a thoughtful and well-documented due diligence process if they expect full condition of assets coverage, and it provides details concerning insurers’ specific expectations concerning the quality and scope of that due diligence investigation in the current environment.

– John Jenkins