While traditional mergers and acquisitions (M&A) have slowed during the coronavirus pandemic, distressed M&A is on the rise. The number of businesses facing Chapter 11 bankruptcy is expected to increase in the coming months as the pandemic continues to force more to close their doors.

Buyers looking to purchase distressed businesses will want to reduce their exposure with the same transactional risk products they use in conventional M&A. Whether acquiring a business in financial distress or a business that has already filed for Chapter 11 bankruptcy, Representations and Warranties (R&W) insurance protects buyers when acquiring businesses distressed due to the impact of the COVID-19 pandemic.

Transferring Risk When Acquiring Financially-Distressed Businesses

When a business is in survival mode and bankruptcy looms large, dedicating resources to compliance becomes a major challenge. For this reason, businesses in financial distress may fail to pay taxes, meet necessary elements of contractual agreements, maintain IT security to prevent cyber breaches and more.

And yet businesses purchasing the entity in financial distress will want to know that these basic functions have been maintained. R&W insurance protects buyers in the event that the seller makes inaccurate representations about the target business at the time of sale.

Similarly, if a target business has filed for bankruptcy and elects to sells its assets, R&W insurance can provide the buyer with important protections.

Considerations for Purchasing Reps and Warranties Insurance

When acquiring a business in financial distress or when purchasing the assets of a bankrupt business, R&W insurance is essential. Here’s what’s important to know before purchasing coverage:

  1. Seek counsel before purchasing R&W insurance coverage. R&W insurance policies are highly negotiated and customized to each acquisition. Seek advice from your insurance broker as well as other business advisors. Remember: a distressed acquisition will move relatively fast when compared to conventional M&A deals. Start early!
  2. Write your bankruptcy story. Underwriters will want to understand your strategic plan post-bankruptcy. What corrective measures will be taken to ensure it doesn’t happen again? This includes the post-bankruptcy capital structure.
  3. Be aware of the COVID-19 exclusion. Most R&W insurance policies now contain a COVID-19 exclusion. You’ll want to work with your broker to understand its scope and to make it as narrow as possible.

Contact your HUB Broker to discuss your insurance coverage and minimize the potential negative impact of Coronavirus on your business. Get the latest information, guidance and resources on Coronavirus (COVID-19) to help you protect what matters most on our Coronavirus Resource Center.