Q. How does the product work?
A. Transaction liability private enterprise (TLPE) is specifically designed to provide small business sellers with peace of mind during an M&A transaction. It is available on deals with an enterprise value between $250,000 and $15m.
The product provides protection for sellers against claims resulting from a breach of representation or warranty leading to financial loss for the buyer. The policy offers cover for up to 7 years, providing 100% enterprise value indemnity. It also covers defence costs.
A policy can be put in place at signing, after signing or after closing of a transaction.
Q. How do you determine premium?
A. The premium is mainly dependant on the sector, jurisdiction and percentage of overall enterprise value that’s being insured. The cost is usually between 1%-2% rate on line (ROL).*
Q. What is excluded?
A. It is important to describe the principle underpinning coverage in our policy: we will not cover any issue which is a breach of a representation or warranty that is known to the seller. We would expect these issues to be disclosed to the buyer as part of a usual M&A transaction. This makes sense as no insurance policy will cover a policy holder for their own fraud.
Our M&A policies contain certain market standard exclusions including accounts receivable, adjustment provisions, condition of assets, environmental remediation, pensions, specific indemnities and tax attributes. Please consult the relevant policy document for your jurisdiction for a definitive list.
Q. How does this product differ from D&O?
A. D&O policies typically address three key insurance clauses for private companies, commonly known as Side A (covering the directors and officers personally), Side B (covering the company for the indemnity given to the directors and officers) and Side C (covering the company for claims against the company).
Generally, liabilities relating to contractual breach are excluded from D&O policies. Since liabilities associated with a breach of warranties or representations are contractual by definition, these liabilities would not be covered under D&O, including D&O run-off.
Q. Why is it only for sellers?
A. Historically, most transaction liability insurance products are issued to the buyer. Our product is only available to the seller. This is to ensure we can offer the policy at a competitive price with the ability to bind cover in as little as 24 hours.
To enable these features, we are relying on and underwriting the seller’s knowledge of the business. Our underwriting process seeks to understand the thoroughness of the disclosures and whether the seller is involved in the day-to-day management of the business being sold.
Were this product available to the buyer, it would take far more time and resources to underwrite as we would need to review the buyer’s due diligence in detail. This would make the product far more expensive and likely inaccessible for the sale of small businesses.
If you have any further questions, please contact the transaction liability team at tlpe@cfc.com.
