Reps and Warranties Insurance Broker Selection: What Questions Should You Ask?

Because acquisitions often move quickly and without much advance warning, proactively planning for broker selection and the R&W placement process is paramount. While most underwriters appreciate 2-3 weeks to place a policy, it can be done in as little as 24 hours if the necessary underwriting information is properly prepared.

Broker selection is often the most important aspect of the placement process. There often isn’t enough time to choose a broker once a deal kicks off, so we recommend choosing a broker that you trust to place R&W policies ahead of time. For first time buyers, it can be hard to tell one broker from the other. For experienced R&W buyers, it can be challenging to determine if you are getting the most out of your current relationship.

The following questions summarize what you should be asking yourself and your team when choosing a broker or evaluating your broker’s effectiveness:

Question: Is the broker that we use for due diligence or the broker that places our corporate insurance the best choice to place R&W?

Answer: The type of expertise and market access necessary to place R&W is completely different from any other insurance product. It’s important to understand their history with the types of deals that your company would likely consider, and how often they get involved with R&W placements.

Question: What type of experience and credibility should the person have that will place R&W on your behalf?

Answer: Someone once told me that there are two kinds of R&W brokers: 1. Those that rely on buyer’s counsel, 2. Those that partner with buyer’s counsel.

The best R&W brokers are experienced M&A attorneys that can call on their legal experience to provide consultative advice throughout the process, be credible when they communicate underwriting challenges to your outside advisors, and bridge gaps between what underwriters can provide and what can reasonably be expected in a transaction negotiation.  You can expect this to pay meaningful dividends when your deal has a unique challenge associated with it, which will change the way that your submission is presented in the market, and/or alter the type of due diligence that you perform.

Question: What transactional insurance products are they qualified to place?

Answer: When hearing “transactional products” most people think solely of R&W. That’s logical since R&W represents most of the transactional products that are placed.  However, sometimes R&W underwriters will not like risks that are best suited for other policies, such as Tax Indemnity, Environmental, Discontinued Products, and Successor Liability. These policies aren’t used as often as R&W, but it’s important for a broker to recognize their application in real time.

Question: Will the broker handle the insurance section of the R&W underwriting call?

Answer: Your broker needs to provide insurance and benefits due diligence services and be able to summarize their findings in a written format that underwriters will appreciate.

Question: Will the broker educate you beforehand?

Answer: It is important to “get smart” on the process, expected underwriting materials, insurer marketplace, and pricing trends.

Question: Should I engage more than one broker and assign markets to each on my next deal?  Let the best broker win?

Answer: Many companies use this approach for their corporate insurance, but it really doesn’t work with R&W. With other insurance coverages, several brokers can get their underwriters to the point of binding coverage. That’s not the case with R&W. You will have to choose an underwriter and pay an underwriting fee of $25,000 – $40,000 in order to get it to the point of binding coverage. With a comprehensive marketing effort, you will probably obtain similar responses from many insurance companies, so price or coverage won’t be the deciding factor when choosing one underwriter over another. In most cases, you will choose an underwriter based on your experience working with them, the underwriter’s understanding of the risks inherent in the transaction, or the certainty that their terms won’t change after underwriting.

Question: How are they compensated?

Answer: Will they rely strictly on the policy commission, or do they charge a fee on top of that? Some brokers charge approximately $35,000 of fees on top of the commission earned for every $10MM of policy limit. If you buy a $30MM limit policy, what will they do to earn an additional $105,000?

Prioritizing broker selection can help you properly prepare and can ensure that the placement process is made smoothly, shrewdly, and safely.  Knowing the right questions to ask can help you make the informed and right decisions.

 

About the Author:

Josh Warren is a Senior Vice President and M&A Advisory Practice Leader at ABD Insurance and Financial Services. Prior to joining ABD, Josh spent 15 years at Equity Risk Partners, an insurance brokerage and consulting firm that concentrated exclusively on private equity firms, venture capital firms, and family offices. Josh was twice named a Power Broker by Risk & Insurance Magazine in the Finance – Private Equity category. He was also named to multiple “40 Under 40” lists, including Business Insurance magazine, Risk & Insurance magazine, and the M&A Advisor. He can be reached at josh.warren@theabdteam.com or 312-300-5759.

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