Insurance for Canadian Private Equity Firms
Author: Kyle Muscat
Now more than ever, Private Equity firms are recognizing the value of insurance carriers to address the exposures attendant to the complex environment in which they operate. In this article we will discuss how insurance can be leveraged to protect fund managers against the inherent risks associated with the purchase, sale and general management of portfolio companies.
What Is Professional Liability Insurance for Private Equity Firms?
PE firms and their managers are faced with threats of litigation arising from dissatisfied investors, portfolio company stakeholders, regulatory investigations, employment practices liability and a myriad of other exposures. In today’s increasingly litigious environment, it is critical that investment firms insulate themselves from these risks through the use of a comprehensive Management & Professional Liability insurance program. From an operational lens, specialized coverage can be custom-tailored to address the following areas of exposure:
- Management Liability (D&O):
- Provides personal financial protection to company directors and officers against the consequences of actual or alleged “wrongful acts”.
- Outside Directorship Liability (D&O):
- Offers a second tranche of liability protection to directors and officers who serve on the board of outside entities.
- Professional Services Liability (E&O):
- Enhanced protection to the fund and its managers against claims of negligence, errors or omissions throughout the normal course of operations.
- Employment Practices Liability (EPL):
- Protection against written employment contract disputes including claims of discrimination and harassment brought forth by employees, independent contractors, lawyers, volunteers and related third parties.
It is recommended that the above coverages be pieced together to provide a bespoke risk-management solution in-line with your firm’s needs. Wordings and coverage can be extended across borders, offering multi-jurisdictional and worldwide protection.
Why should I understand my portfolio company’s Insurance Policy?
While firm-level exposures may be addressed with the coverages mentioned above, it is of equal importance that investors manage and respond to the inherent risks unique to each portfolio company’s operations.
We understand that managing different types of insurance programs for every company across your portfolio can be costly, complex, and inefficient when executed in a fragmented approach. By partnering with the right insurance broker, private equity firms can take a holistic, coordinated approach to risk. This holds particularly true during the due diligence stage of an acquisition, as any inherent gaps or unforeseen costs of insurance can be leveraged during the negotiation process. This in turn can yield better outcomes, including buying power through economies of scale, continuity of coverage across the portfolio, better claims recovery and improved valuations upon exit.
What type of Insurance should I think about during Mergers and Acquisitions?
Transactional insurance products offer a third pillar of protection to insulate firms against the financial risks involved in the purchase, sale or merger of companies. Traditionally speaking, this includes:
- Representations & Warranties Insurance (R&W):
- This offers protection against financial loss due to any misrepresentation or warranties made on behalf of the selling company. Examples include undisclosed liabilities, loss of material customers and financial statement misrepresentations.
- Tax Liability Insurance:
- Provides greater purchase price clarity by shifting the responsibility of known tax contingencies away from the insured and onto the insurance company.
- Contingent Liability Insurance:
- Provides coverage to offset the risks associated with specific and identified contingent liabilities which neither party is willing to stand behind. This may include known exposures such as impending lawsuits, shareholder disputes, and regulatory investigations.
Here at FCA we have observed a recent uptick in the number of Canadian firms who choose to employ transactional liability insurance as a tool for M&A deal facilitation. Both buy and sell-side participants benefit from the financial clarity afforded under these policies, including a reduction of the indemnity escrow requirements.
Insurance is often a minor focus of PE firms. How can it be leveraged to add value throughout the deal lifecycle?
By partnering with an innovative and experienced broker, fund managers can spend less time dealing with the minutiae of insurance terms and more time focusing on what matters most. A competent risk management partner can offer value and support throughout the deal lifecycle, including:
- Front-line insurance due diligence to support target acquisitions
- Evaluation and management of aggregation strategies across the entire portfolio
- Enhanced protection through comprehensive, catch-all wordings
- Predictable pricing with flexibility for organic growth and bolt-on acquisitions
- Frictionless transitions at exit through portable and transparent coverage structures
About FCA Insurance Brokers:
Private Equity firms across the country continue to trust FCA Insurance brokers as their preferred risk management partner. We are an independent, privately-owned brokerage with a 100-year history deep-rooted in the Canadian insurance marketplace. We encourage you to give us a call and learn how your firm can leverage our team’s insurance expertise to drive exceptional results.