New products aid corporate finance: Several forms of insurance have been developed to help companies get financing for a transaction or protect themselves from loss.

• Author: Paar, Randy
• Position: Insurance

In the past five years, new insurance products have been developed to facilitate mergers, acquisitions and other forms of corporate transactions by translating future contingencies into current premium dollars. These products also can help a corporation obtain financing based on future income through a policy that guarantees a future revenue stream. Thus insurance is no longer a last step - an afterthought - in a corporate deal. It can now affect the structure of the transaction, and an insurance professional may be present along with the investment bankers during the initial strategy sessions.

Corporate policyholders should welcome these new sources of financing and the flexibility that these insurance products provide. However, policyholders should also be aware of the potential pitfalls that use of these products may bring. Three categories of new products are particularly noteworthy as tools for corporate deal-making, though with a few caveats; these categories of insurance - M&A, finite risk and credit enhancement - are not all-inclusive, as new products constantly are being developed and the policies actually sold generally are modified to meet specific needs.

M&A Insurance

Perhaps the fastest-growing area for creative use of insurance is mergers and acquisitions. These involve numerous future contingencies that the parties need to either value as of the closing date and work into the price of the deal; or provide for in a reserve, indemnification or an escrow fund, In response, many commercial insurance companies have M&A practice groups ready to design and sell a product to help players finalize a deal.

For instance, the representations and warranties section of the purchase and sale agreement often is the subject of contentious negotiations. Frequently, the representations and warranties are backed by an indemnification or escrow fund. To help resolve these disputes, and in lieu of tying up capital in the escrow fund, many insurance companies sell representations and warranties insurance. This insurance provides indemnification for loss in the event that there is a breach of the representations in the purchase and sale agreement.

Although the scope of the coverage is defined by the actual policy wording, the policies generally are marketed as indemnification for losses arising out of a breach of a representation of fact, and not as indemnification for losses arising out of a breach of a covenant or a projection. Thus, a representations and warranties insurance policy may not insure the calculation of a purchase price based on a multiple of projected earnings.

Similarly, the tax consequences of a merger or acquisition, or any corporate transaction, may be uncertain. An opinion letter from...