Transactional Gap Insurance for Companies
Buyers and sellers can purchase transactional gap insurance to protect themselves during the sale or purchase of a company. What gets indemnified (secure against legal liability or require compensation for harm or loss), how long the seller is responsible and establishing the limit of what can be recovered can take a long time to determine.
Gallant Risk & Insurance Services, Inc., offers transactional gap insurance coverage to put companies at ease during the negotiations for a merger or acquisition deal. Transactional gap insurance can address risks that may prevent the closing of a sale—on the buyer’s or seller’s side—by transferring potential liabilities. We utilize the following:
- Loss portfolio transfer
- Representations (reps) and warranties (R&W) coverage
- Tax opinion liability coverage
- Transactional environmental liability
What Does the Coverage Provide?
Transactional insurance can contain various products, including representations and warranties, tax liability, pollution and contingent liability. Your customized policy can include any or all of these options, depending on your needs.
Bridging the Gap
Transactional gap insurance can make clarifications during a bid and help build a bridge between seller and buyer. As a seller, indemnities and survival periods should be minimized, while buyers should maximize their escrow to extend the representation period. Transactional gap insurance is designed to meet in the middle between both parties and protect the insured.
Representations and Warranties
This policy is designed to help protect from financial loss during the buying and selling process in the event of a contract breach or faulty representation. Information, warranties and statements make guarantees that need to be upheld. With a representation and warranty policy in place, the asset purchase agreement or sales and purchase agreement is protected.
Tax liability covers transactional tax positions. If unpaid federal taxes result in a lien on assets by the IRS, significant delays and expenditures can occur. This policy can help minimize or eliminate these issues.
Problems can arise during closing, which can lead to a potential financial loss for the buyer. Litigation requires a valuation of the risks involved, which is covered by contingent liability.
Protect Your Financial Investment
When issues arise during a transaction, neither the buyer nor the seller will want to be responsible. For every deal, a buyer can purchase coverage for potential risks involved with acquiring a new company.
Conversely, sellers typically want to receive payment and be rid of the company. These negotiations can result in a lengthy argument and sometimes involve expensive lawyers and courtroom debates. Prevent these headaches when purchasing or selling a business with a transactional gap insurance plan.
Transactional Gap Insurance FAQ
What is the most common type of transactional gap insurance?
R&W insurance has become increasingly common for mergers and acquisitions. This is because:
- Policies are flexible in that they can be purchased as either seller side or buyer side coverages
- Limitations and retentions can be negotiated
- R&W policies can provide benefits for both parties simultaneously.
R&W insurance, as well as all types of transactional gap insurance policies, aims to expedite closing and negotiations and protect all parties involved from unknown and contingent losses.
What is the difference between R&W insurance and contingent liability insurance?
While R&W insurance protects from unknown exposures (like breach of contract), contingent liability insurance provides coverage within the context of the transaction. Some risks that might be eligible for coverage include:
- Litigation exposures
- Environmental exposures
- Intellectual property infringement claims
- Employment matters and disputes
- Exposures relating to accounting methods adopted in the past
Contingent liability insurance may eliminate or mitigate the parties’ exposure to these risks, enabling the transaction to close more quickly and smoothly.
When is transactional environmental insurance necessary?
Transactional environmental insurance protects buyers and sellers from unknown pollution that pre-dates an acquisition and can protect a buyer from pollution liabilities from future operations.
Transactional environmental insurance is especially useful as the above risks are not typically covered in standard general liability and property insurance. This type of coverage can be essential for buyers, sellers, developers, and lenders.
How can tax liability insurance protect the buyer?
In mergers and acquisitions, tax liability insurance protects the taxpayer against losses incurred in connection with a transaction, reorganization, accounting treatment, investment, or other type of taxable event. Historic tax positions of a target acquisition or entity are also covered under tax liability insurance.
How do I know which policies I need?
It really depends on the type of merger or acquisition, as well as the business or company involved. Gallant Risk & Insurance Inc., can help you assess the type of transactional insurance that is right for you.
How can I purchase transactional gap insurance?
Gallant Risk & Insurance Services is a full-service insurance agency that represents insurance carriers. We are committed to regulatory compliance by providing our clients with accurate information on proper insurance coverages, product benefits and competitive pricing.
We can help you make the best policy decisions for you and your business, including transactional gap insurance as well as other pertinent policies, including:
- Contingency insurance
- Executive, employment and financial liability insurance
- Property insurance
- Builders risk
- And more