10 Insurance Tips For Private Equity Firms
To help secure a prosperous 2015, most private equity firms likely are focused on economic forecasts and deal trends. But insurance may be no less important to year-end results.
March 11, 2015 at 07:49 AM
6 minute read
To help secure a prosperous 2015, most private equity firms likely are focused on economic forecasts and deal trends. For some private equity firms, however, insurance may be no less important to their year-end results. Trends in acquisitions, as well as regulatory enforcement, continue to draw attention to the importance of insurance for PE firms. Adjustments to their insurance programs and to their portfolio companies can provide vital protection against major risks—known and unknown.
While specific changes depend on each firm, the following 10 insurance tips for PE firms in 2015 will be a good place to start. Firms should consider reaching out to brokers and/or insurance coverage counsel to discuss these and other potential improvements to their insurance programs.
1. Reps and Warranties
One of the most significant deal trends in 2014 was the emergence of reps and warranties insurance as a key component of acquisitions. Sellers have the leverage in today's marketplace to reject significant indemnity obligations, and are insisting that buyers pay the premium for this coverage, which insures the representations and warranties made by a seller in a deal. By substituting the coverage for a broad indemnity obligation, the sellers are able to “close their books” on deals without the fear of future liability.
An understanding of reps and warranties coverage, therefore, is vital for PE firms to compete with strategic buyers in reaching deals. PE firms should get up to speed on them and reach out to brokers and/or insurance coverage counsel for detailed information about the types of coverage available in the marketplace.
2. Blended Policies
Increased regulatory scrutiny from the U.S. Securities and Exchange Commission related to PE firms' management practices, including the allocation of fees to different funds, is highlighting the importance of insurance coverage related to firm management. Many PE firms rely largely on directors' and officers' (D&O) coverage to protect them against such claims. A standalone D&O policy, however, may have gaps in coverage. Moreover, obtaining separate D&O and professional liability policies can result in overlapping coverage, contradictory provisions and confusion.
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