Don’t Be Blindsided, Be Prepared: The Importance of TLPE Insurance

By Douglas Miller, Horton Consultant/Assurex Partner

The world of mergers and acquisitions is filled with risk. We’ve seen it before: despite careful vetting and a long-drawn out process, a company might not realize they’ve walked into a bad deal until all the paperwork is finalized. The seller could provide inaccurate representation or warranty, which could result in financial loss for the buyer – and if the buyer is a small business, this could be lethal.

Our advice to small businesses? Don’t be blindsided – be prepared. Transaction Liability Private Enterprise (TLPE) insurance protects small and micro businesses from becoming completely wiped out when the worst occurs. We’ve put together the following information help you determine if you qualify for TLPE insurance, and what specific types of situations it will cover.

What Should I Know About TLPE Insurance? Who Typically Qualifies?

New Transactional Risk Liability facilities are designed to support the $8 billion mergers and acquisitions market in the United States for smaller deals. Transactional Liability Private Enterprise (TLPE) insurance is an example of such a facility out of Lloyds of London, focused on Sell-Side Representations & Warranties coverage for transactions with total enterprise values between $250,000 and $10,000,000.

What Sorts of Risks Does TLPE Insurance Cover?

Sellers of small businesses face post-closing risk from buyers for breaches of representations and warranties made in the purchase agreement. Representations and warranties may include financial statements, compliance with applicable laws, tax matters, material contracts and others. Because of the small size of these transactions, such an innocent misrepresentation may lead to a significant post-closing economic loss to the seller as a percentage of the deal size. Furthermore, 100% coverage to enterprise value may give the seller more comfort and flexibility in negotiating terms in the purchase agreement relating to indemnity caps, escrows and survival periods thus facilitating closing.

What Are Highlights of a TLPE Insurance Policy?

The policy is a six-year Sell-Side policy covering all representations and warranties including defense costs and damages on an Insurer duty to defend and surplus lines basis. Highlights include:

• Limit equivalent to the deal size (enterprise value)
• Deductible of 1% of enterprise value ($10,000 minimum)
• Premium range of 1-3% of limit purchased (typically the enterprise value of the deal), normally closer to 1%.   No minimum premium.
• Streamlined underwriting process:
  
  • As quickly as 3 business days
  • No underwriting fee requirement
  • Application oriented: no underwriting call, no data-room access requirement
  • Claim trigger to mirror definition of breach in the purchase agreement
  • Seller fraud allegations covered unless proven pursuant to final non-appealable adjudication
  • Standard representations and warranties exclusions including known matters with possible addition of deal and/or industry specific items
  • Coverage may be placed even after the deal has already closed
  • Limited appetite for pharma, healthcare, financial institution and heavy manufacturing
  • Target does not need to have historical audited financials (but an audit standard representation to unaudited financials will not be covered)

Where Can I Learn More?

If you haven’t already, now is the time to talk to a professional and ensure you are protected. To learn more or to proceed with a transaction, please reach out Horton’s mergers and acquisitions team here.

Douglas Miller is a Horton Consultant/Assurex Partner with expertise in Specialty Risk. He has 30+ years of industry experience, which includes extensive advising and program structuring knowledge.