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Reduce the risk of “unknown matters" with thorough due diligence

We caught up with AIG to get their take on where M&A insurance is heading and how to reduce “unknown matters".

Mergermarket: M&A insurance is generally understood to be intended to cover “unknown matters". Do you see a risk towards a decreased scope of due diligence to try to reduce costs and also maximise insurance cover?

AIG: I agree that M&A insurance (W&I Insurance) is generally understood to be intended to cover “unknown matters”. However, coverage in respect of “unknown matters” is based on the assumption that a reasonably detailed disclosure process has been completed and that a reasonably scoped due diligence has been carried out. As insurers are normally reluctant to cover “unknown matters” within areas that have not been covered by the scope of the due diligence (or disclosure for that sake), we rather see a tendency towards an increased scope of due diligence (at least within areas where parties would require insurance coverage).

Mergermarket: You mentioned before that DD reports are better tailored to insurer requirements. On the other hand, nil recourse deals are becoming more customary, where sellers have no more skin in the game backing up the warranties. Does this generate concerns about the sell-side process getting too streamlined so disclosure and warranty negotiation process becoming less thorough?

AIG: Naturally, we are more thorough when considering the disclosure process, the scope and quality of the data room and negotiation process in “nil recourse deals”. Having said this, as mentioned W&I insurance only covers “unknown matters” within areas that have been subject to disclosure as well as due diligence. Accordingly, where there is a general lack of disclosure and/or due diligence, the insurers would – depending on the circumstances - seek to carve out such areas. While it is fair to say that the sell side process and disclosure exercise have become more streamlined in order to meet to the W&I insurance requirements, we do not see a general tendency towards a disclosure and warranty negotiation process that is less thorough. However, there may be exceptions, and we would as mentioned have a more cautious approach when underwriting “nil recourse deals”.

To get more insight from AIG you can watch Dennis Froneberg, Senior Underwriter - Mergers & Acquisitions Financial Lines at AIG Europe Limited speaking on the effective strategies for deal execution panel at the Nordic M&A and Private Equity Forum below. 

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