Transactional Liability

First and foremost the Purchase and Sale agreement is the basis for Transactional
Liability Products and the underwriting criteria for underwriting them.
A List of Transactional liability Products
1. Representations and Warranties Policy
2. Tax opinion coverage
3. Loss Mitigation Policy
Representations and Warranties Policy
Covers breaches in the Reps and Warranties in the Purchase and Sale agreement. It strictly
follows the Purchase and Sale agreement on following topics;
1. Indemnification: This policy can stand in front of the seller for some or all of the
indemnification. This allows the seller to sell and be free of clawbacks.
2. Escrow: This policy can replace the escrow based on the fact that the policy stands as
that escrow
3. Survival of the Reps and Warrants can allow an extension of the survival period eg. 12
months to 18-24 months and statutory for environmental and tax.
Keep in mind this policy isn’t the end all for post- closing liabilities. It is strictly a breach
policy. The carriers perform extensive due diligence which includes examination of the Data
room and copies of the Due diligence reports of all the service vendors. Eg. Lawyers,
accountants and insurance.
In the US if there is a breach it would be covered. Outside of the US if the information
about the breach is discovered at the time of the loss in the data room there is no coverage. No
matter where it has been hidden.
Rep and Warranty policies have been around for 30 years typically the cost was 4-5% of
the limit purchased. No one really bought the policy until 2008 when the market became a
sellers market
In 2008 with the sellers market there was a transformation in the product and the use
of the product. It became a bid enhancement product. The cost was 1.5% of the limit
purchased. It dealt with the difference between what the seller wanted to offer and what the
buyer needed. Eg. Seller wanted to give 10 million in indemnification and survival of Reps and
Warranties 12 months or in some cases none. This newly designed policy enhanced the bid by
offering 20 mill and extending the survival to 18-24 months with statutory on tax and
environmental. Thousands of these policies were sold. This product made the R&W Policy a real
Third major rendition. This new policy brought back the 4-5% cost but will replace and
stand in front of the indemnity section of the Purchase and Sale agreement. Many times the
attorneys representing the R&W carrier will ask for insurance to be placed before they will
provide coverage. Depending on what the company’s operations were and what were the
predecessor’s businesses. Careful attention needs to be paid on the Purchase and Sale language
both in the definition of pre-closing liabilities and the definition section of the contract.
In the situation I mentioned about the generational ownership of property, both the
buyer and the R&W underwriter will most likely want a phase 1 done on the property. Then the
economics of the deal will determine who is accepting what pre and post-closing on going
liabilities. In the other example of the partnership break up this will depend on the cooperation
of the firing party. Certainly there will be a long hard fight based on the nature of their
occupations and their ability to make a living going forward.
Tax opinion Coverage
Typically, it is purchased in a transaction where certain practices may be validated based on the
determination of the IRS. This policy allows the company to be bought with a backstop on the
tax issues, carring forward deductibility issues etc.
Loss Mitigation
This is a policy that buys out litigation. Let’s say Company A is sued for 100 mill and you
are trying to sell your business and the 100 Mill is killing any chance you have of selling the
company. A carrier such as AIG might offer to buy the claim for 50Mill knowing they can settle it
for 35 Mill. AIG makes 15 mill and you get to take 100 Mill off your books for 35 Mill. Thus
allowing you the certainty to sell the company.