DisclosureGap® Warranty & Indemnity Insurance
Information

Ambridge Partners’ DisclosureGap® Warranty & Indemnity Insurance provides insurance for losses incurred as a result of breaches or inaccuracy of the warranties and indemnities made in a wide variety of business agreements.

For example, in the context of a sale agreement a DisclosureGap® policy can be issued:

  • to the seller(s) of a business to respond to claims made against it by the buyer for losses it has incurred as a result of any inaccuracy or breach of the warranties and indemnities made by the seller to the buyer in the sale agreement; or
  • to the buyer of a business to respond to losses it has incurred as a result of the breach of warranties and indemnities made by the seller(s) to the extent that they exceed the amount of losses for which such seller(s) have agreed to provide an indemnity;

Although primarily designed to be utilized in the context of a sale agreement, DisclosureGap® policies have broad applications and can be utilized to insure against losses incurred as a result of the inaccuracy or breach of warranties and indemnities contained in other agreements, such as licensing, financing and investment agreements.

Disagreements over the scope of warranties and indemnities made by one party to another, or the scope, duration or amount of a parties indemnification obligations as respects losses incurred because of the inaccuracy or breach of those warranties and indemnities can often lead to deal breaking negotiating gaps. Ambridge Partners’ DisclosureGap® policy can be an effective tool to bridge these gaps.

Some of the common deal points for which Ambridge Partners’ DisclosureGap® policy can provide solutions are set out here. Whether or not the deal point that you or your client faces is described, Ambridge Partners’ experienced underwriting team will work with you to provide you and your clients with the DisclosureGap® Warranty & Indemnity Insurance solutions they require.

Uses by Deal Point

Some examples of where DisclosureGap® Representations & Warranties Insurance is responsive include:

  • Duration of indemnity
    The buyer in a transaction requires that the indemnity given by the seller apply to breaches or inaccuracies of the warranties and indemnities that are discovered for up to thirty six months after closing. The seller is only prepared to offer an indemnity for breaches or inaccuracies discovered up to the twelve month anniversary of closing. A DisclosureGap® policy is issued to cover losses resulting from claims first discovered by the buyer after the twelve month anniversary and before the thirty six month anniversary of closing.
  • Quantum of indemnity
    The final deal point in a sale agreement is the quantum of the amount of the indemnity (or "indemnity cap") that the seller will provide to the buyer for losses suffered as a result of the inaccuracy or breaches of warranties and indemnities. The buyer requires an indemnity cap of $50,000,000 (or 25 percent of the transaction consideration). The seller is only willing to provide an indemnity cap of $20,000,000 (or 10 percent of the transaction consideration). A DisclosureGap® policy with a $30,000,000 policy limit is issued to respond to losses that exceed $20,000,000.
  • Scope of warranties and indemnities
    The final deal point in a sale agreement is the quantum of the amount of the indemnity (or "indemnity cap") that the seller will provide to the buyer for losses suffered as a result of the inaccuracy or breaches of warranties and indemnities. The buyer requires an indemnity cap of $50,000,000 (or 25 percent of the transaction consideration). The seller is only willing to provide an indemnity cap of $20,000,000 (or 10 percent of the transaction consideration). A DisclosureGap® policy with a $30,000,000 policy limit is issued to respond to losses that exceed $20,000,000.
  • Financial ability of seller to perform under agreed indemnity is questionable
    The seller has agreed to the scope, duration and quantum of the indemnity for losses incurred by the buyer as a result of the inaccuracy or breach of the warranties and indemnities. The seller has suffered operating losses and is highly leveraged and will be using the proceeds from the sale to pay off most of its bank debt causing the buyer to be concerned about the seller'sability to perform under the indemnity. A DisclosureGap® policy is issued to respond to losses covered under the indemnity in the event that the seller is not financially able to meet its obligations.
  • Indemnity not available because target is public company
    The target company in a transaction is a publicly traded company. While the parties have agreed to the scope of the seller's warranties and indemnities, they do not survive closing as the proceeds of the transaction will be distributed to the shareholders of the target leaving the buyer with no recourse. A DisclosureGap® policy is issued to respond to losses incurred by the buyer for breaches of the seller's warranties and indemnities in excess of an agreed retention.
  • Indemnity not available because seller is company reorganizing under Chapter 11
    The target company in a transaction is one of the few valuable assets of a company reorganizing under Chapter 11 of the United States Bankruptcy Code. While the buyer has agreed to the scope of the warranties and indemnities, they do not survive closing as the proceeds of the transaction will be distributed to the creditors of the seller leaving the buyer with no recourse. A DisclosureGap® policy is issued to respond to losses incurred by the buyer for breaches of the seller's warranties and indemnities in excess of an agreed retention.
  • Indemnity not available because seller intends to liquidate after closing of transaction
    The target company in a transaction is the final portfolio investment of a private equity fund that will make a final distribution and liquidate after the transaction closes. While the buyer has agreed to the scope of the warranties and indemnities, the seller is not willing to provide an indemnity to support the seller's warranties and indemnities as this would prevent distribution of the fund's assets to its partners. A DisclosureGap® policy is issued to respond to losses incurred by the buyer for breaches of the seller's warranties and indemnities in excess of an agreed retention.
  • Buyer’s lenders require additional protection
    The buyer in a transaction is a private equity fund. As such, most of the transaction consideration will be borrowed from a consortium of lenders. While the buyer is satisfied with the scope, quantum and duration of the indemnity given by the seller to respond to breaches of the seller's warranties and indemnities, the credit committee of the lead lender requires that the quantum of the indemnity be increased by 20% above the agreed amount. A DisclosureGap® policy is issued to respond to losses incurred by the buyer for breaches of the seller's warranties and indemnities in excess of an agreed retention.
  • Seller unwilling to make any representations and warranties
    The seller of a business is the foreclosing bank. As it has not been involved in the management of the business, it is only willing to sell on an "as-is where-is basis" and is not willing to provide any warranties and indemnities. The buyer is a group of private equity funds that have completed significant due diligence on the business being purchased. While the buyer believes that it has identified all of the risks, there are certain facts about the business that would normally be addressed by warranties and indemnities (and supporting indemnities given by the seller). If any of these facts were materially inaccurate, the impact on the target business could be significant. The buyer works with underwriters to develop a DisclosureGap® policy that will respond to losses it incurs as the result of identified "synthetic" warranties and indemnities being inaccurate or breached.
  • Non-management seller(s) unwilling to provide indemnity
    The non-management sellers of a closely-held business have been inactive in the target business for many years and are unwilling to bear their proportionate liability under the indemnity that the buyer has required as respects losses resulting from the inaccuracy or breach of any of the seller's warranties and indemnities. A DisclosureGap® policy is issued to cover the non-management sellers' proportionate liability under the indemnity that the buyer has required.
  • Seller cannot liquidate because of an indemnity given in an old transaction
    The shareholders of a privately held company have sold off all of their key assets and have voted to liquidate the company. The only remaining potential liability of the company is the indemnity provided to the buyer under a sale agreement that closed several years ago to cover losses incurred as a result of breaches of the seller's warranties and indemnities when selling its largest subsidiary. The company's board is not prepared to authorize a final distribution until this potential liability is addressed. A DisclosureGap® policy is issued to cover the company's liability under the indemnity.
Uses by Transaction Type

Potential uses of the product include:

  • Financings & Investments

    Buyer's lenders require additional protection


    The buyer in a transaction is a private equity fund. As such, most of the transaction consideration will be borrowed from a consortium of lenders. While the buyer is satisfied with the scope, quantum and duration of the indemnity given by the seller to respond to breaches of the seller's representations and warranties, the credit committee of the lead lender requires that the quantum of the indemnity be increased by 20% above the agreed amount. A DisclosureGap® policy is issued to respond to losses incurred by the buyer for breaches of the seller's representations and warranties in excess of an agreed retention.

    Foreclosing bank unwilling to make any representations and warranties


    The seller of a business is the foreclosing bank. As it has not been involved in the management of the business, it is only willing to sell on an "as-is where-is basis" and is not willing to provide any representations and warranties. The buyer is a group of private equity funds that have completed significant due diligence on the business being purchased. While the buyer believes that it has identified all of the risks, there are certain facts about the business that would normally be addressed by representations and warranties (and supporting indemnities given by the seller). If any of these facts were materially inaccurate, the impact on the target business could be significant. The buyer works with underwriters to develop a DisclosureGap® policy that will respond to losses it incurs as the result of identified "synthetic" representations and warranties being inaccurate or breached.

    Investor providing seed money for start-up venture


    While a seed investor has been provided with representations and warranties made by the entity about the intellectual property that is key to the venture, the start-up will not, practically speaking, have any assets to indemnify the investor if any losses are incurred as a result of any breaches of such representations and warranties. A DisclosureGap® policy is issued to indemnify the investor for losses incurred as a result of the inaccuracy or breach of the intellectual property representations and warranties.
  • Licensing Agreements

    Financial ability of licensor to perform under agreed indemnity is questionable


    The licensee of certain technology is concerned about the ability of the non-profit licensor to indemnify it for losses it may incur as a result of the inaccuracy or breach of any of the intellectual property representations and warranties made in the license agreement. A DisclosureGap® policy is issued to respond to losses incurred by the buyer for breaches of the representations and warranties in excess of an agreed retention.
  • Liquidations

    Seller can not liquidate because of an indemnity given in an old transaction


    The shareholders of a privately held company have sold off all of their key assets and have voted to liquidate the company. The only remaining potential liability of the company is the indemnity provided to the buyer under a sale agreement that closed several years ago to cover losses incurred as a result of breaches of the seller's representations and warranties when selling its largest subsidiary. The company's board is not prepared to authorize a final distribution until this potential liability is addressed. A DisclosureGap® policy is issued to cover the company's liability under the indemnity.

    No indemnity available because seller intends to liquidate after closing of transaction


    The target company in a transaction is the final portfolio investment of a private equity fund that will make a final distribution and liquidate after the transaction closes. While the buyer has agreed to the scope of the representations and warranties, the seller is not willing to provide an indemnity to support the seller's representations and warranties as this would prevent distribution of the fund's assets to its partners. A DisclosureGap® policy is issued to respond to losses incurred by the buyer for breaches of the seller's representations and warranties in excess of an agreed retention.
  • Mergers & Acquisitions

    Duration of indemnity is a deal point


    The buyer in a transaction requires that the indemnity given by the seller apply to breaches or inaccuracies of the representations and warranties that are discovered for up to thirty six months after closing. The seller is only prepared to offer an indemnity for breaches or inaccuracies discovered up to the twelve month anniversary of closing. A DisclosureGap® policy is issued to cover losses resulting from claims first discovered by the buyer after the twelve month anniversary and before the thirty six month anniversary of closing.

    Quantum of indemnity is a deal point


    The final deal point in a sale agreement is the quantum of the amount of the indemnity (or "indemnity cap") that the seller will provide to the buyer for losses suffered as a result of the inaccuracy or breaches of the seller's representations and warranties. The buyer requires an indemnity cap of $50,000,000 (or 25 percent of the transaction consideration). The seller is only willing to provide an indemnity cap of $20,000,000 (or 10 percent of the transaction consideration). A DisclosureGap® policy with a $30,000,000 policy limit is issued to respond to losses that exceed $20,000,000.

    Scope of representations and warranties are deal point


    A key deal point in a sale agreement is the wording of the representations and warranties relating to intellectual property. The buyer's board of directors requires its standard wording for any acquisition where the intellectual property of the target is a critical part of the business. The seller is unwilling to agree to the requested wording. A DisclosureGap® policy is issued with coverage provided to the buyer for any losses they incur as a result of the inaccuracy or breach of the representations and warranties worded in the manner required by their board.

    Financial ability of seller to perform under agreed indemnity is questionable


    The seller has agreed to the scope, duration and quantum of the indemnity for losses incurred by the buyer as a result of the inaccuracy or breach of the representations and warranties. The seller has suffered operating losses and is highly leveraged and will be using the proceeds from the sale to pay off most of its bank debt causing the buyer's board concern about its ability to perform under the indemnity. A DisclosureGap® policy is issued to respond to losses covered under the indemnity in the event that the seller is not financially able to meet its obligations.

    Indemnity not available because target is public company


    The target company in a transaction is a publicly traded company. While the parties have agreed to the scope of the seller's representations and warranties, they do not survive closing as the proceeds of the transaction will be distributed to the shareholders of the target leaving the buyer with no recourse. A DisclosureGap® policy is issued to respond to losses incurred by the buyer for breaches of the seller's representations and warranties in excess of an agreed retention.

    Indemnity not available because seller is company reorganizing under Chapter 11


    The target company in a transaction is one of the few valuable assets of a company reorganizing under Chapter 11 of the Bankruptcy Code. While the buyer has agreed to the scope of the seller's representations and warranties, they do not survive closing as the proceeds of the transaction will be distributed to the creditors of the seller leaving the buyer with no recourse. A DisclosureGap® policy is issued to respond to losses incurred by the buyer for breaches of the seller's representations and warranties in excess of an agreed retention.

    Indemnity not available because seller intends to liquidate after closing of transaction


    The target company in a transaction is the final portfolio investment of a private equity fund that will make a final distribution and liquidate after the transaction closes. While the buyer has agreed to the scope of the seller's representations and warranties, the seller is not willing to provide an indemnity to support the seller's representations and warranties as this would prevent distribution of the fund's assets to its partners. A DisclosureGap® policy is issued to respond to losses incurred by the buyer for breaches of the seller's representations and warranties in excess of an agreed retention.

    Buyer's lenders require additional protection


    The buyer in a transaction is a private equity fund. As such, most of the transaction consideration will be borrowed from a consortium of lenders. While the buyer is satisfied with the scope, quantum and duration of the indemnity given by the buyer to respond to breaches of the seller's representations and warranties, the credit committee of the lead lender requires that the quantum of the indemnity be increased by 20% above the agreed amount. A DisclosureGap® policy is issued to respond to losses incurred by the buyer for breaches of the seller's representations and warranties in excess of an agreed retention.

    Seller unwilling to make any representations and warranties


    The seller of a business is the foreclosing bank. As it has not been involved in the management of the business, it is only willing to sell on an "as-is where-is basis" and is not willing to provide any representations and warranties. The buyer is a group of private equity funds that have completed significant due diligence on the business being purchased. While the buyer believes it has identified all of the risks, there are certain facts about the business that would normally be addressed by seller's representations and warranties (and supporting indemnities given by the seller). If any of these facts were materially inaccurate, the impact on the target business could be significant. The buyer works with underwriters to develop a DisclosureGap® policy that will respond to losses it incurs as the result of identified "synthetic" representations and warranties being inaccurate or breached.

    Non-management seller(s) unwilling to provide indemnity


    The non-management sellers of a closely-held business have been inactive in the target business for many years and are unwilling to bear their proportionate liability under the indemnity that the buyer has required as respects losses resulting from the inaccuracy or breach of any of the seller's representations and warranties. A DisclosureGap® policy is issued to cover the non-management sellers' proportionate liability under the indemnity that the buyer has required.

    Seller cannot liquidate because of an indemnity given in an old transaction


    The shareholders of a privately held company have sold off all of their key assets and have voted to liquidate the company. The only remaining potential liability of the company is the indemnity provided to the buyer under a sale agreement that closed several years ago to cover losses incurred as a result of breaches of the seller's representations and warranties when selling its largest subsidiary. The company's board is not prepared to authorize a final distribution until this potential liability is addressed. A DisclosureGap® policy is issued to cover the company's liability under the indemnity.
  • Restructurings & Workouts

    Financial ability of seller to perform under agreed indemnity is questionable


    The seller has agreed to the scope, duration and quantum of the indemnity for losses incurred by the buyer as a result of the inaccuracy or breach of the seller's representations and warranties. The seller has suffered operating losses and is highly leveraged and will be using the proceeds from the sale to pay off most of its bank debt causing the buyer's board concern about its ability to perform under the indemnity. A DisclosureGap® policy is issued to respond to losses covered under the indemnity in the event that the seller is not financially able to meet its obligations.

    No indemnity available because seller is company reorganizing under Chapter 11


    The target company in a transaction is one of the few valuable assets of a company reorganizing under Chapter 11 of the Bankruptcy Code. While the buyer has agreed to the scope of the seller's representations and warranties, they do not survive closing as the proceeds of the transaction will be distributed to the creditors of the seller leaving the buyer with no recourse. A DisclosureGap® policy is issued to respond to losses incurred by the buyer for breaches of the seller's representations and warranties in excess of an agreed retention.
FAQs

FAQs:

  • Who can be the insured under a DisclosureGap® policy?
    When a DisclosureGap® policy is purchased in the context of an M&A transaction, the insured can be either the seller or the buyer (or where there are multiple sellers or buyers, a sub-set of the sellers or buyers). For example, one of the sellers in a transaction may be unable to retain any trailing liabilities associated with a transaction because it will liquidate following the close of the transaction. In other situations, the risk appetite of one of the sellers or buyers may differ from that of its co-sellers or buyers. When a DisclosureGap® policy is purchased in the context of a licensing transaction, the insured can be either the licensee or the licensor. In addition, sometimes financiers or lenders to a transaction are the driving force behind coverage. In such situations, these parties can be named as loss-payees under the insurance.
  • Can a DisclosureGap® policy be purchased in connection with the acquisition of a publicly-traded company?
    Yes. As the warranties and indemnities given to the buyer of a publicly-traded company do not survive closing of the transaction and the proceeds are distributed to the shareholders, DisclosureGap® is an ideal risk-mitigation solution for the buyer of a publicly traded company.
  • Is DisclosureGap® Representations & Warranties Insurance designed to be a substitute for doing due diligence in connection with a transaction?
    No. DisclosureGap® Warranty & Indemnity Insurance is designed to cover an insured for unknown breaches of warranties and indemnities after due diligence has been conducted. While not designed to be a substitute for due diligence, it can be used when the buyer has conducted due diligence but nevertheless requires additional protection. An example of this may be where the target company is a foreign jurisdiction and while thorough due diligence has been conducted, the buyer has a concern that there are risks of doing business in that jurisdiction that may not have been identified.
  • Can a DisclosureGap® policy cover representations and warranties relating to intellectual property?
    Yes. The accuracy of the intellectual property warranties and indemnities can be critical to the value of the asset being licensed or purchased and is a perfect example of the type of warranty and indemnity covered by Ambridge Partners.
  • Can a DisclosureGap® policy be tailored to cover only certain identified representations and warranties?
    Yes. Tailoring coverage to respond to only a limited number of warranties and indemnities is often a more cost-efficient way of providing the insurance for those areas where the insured requires additional security.
  • Can a DisclosureGap® policy cover breaches of representations and warranties that are known at the time coverage is purchased?
    No. While a DisclosureGap® policy is not designed to provide coverage for inaccuracies of breaches of warranties and indemnities that are known to the insured(s) at the time the policy is purchased, Ambridge Partners' contingency insurance products can be endorsed to our DisclosureGap® policy to provide you with coverage for many identified exposures. Please bring these actual or potential exposures to our attention during the underwriting process so that we can advise you if coverage can be provided.
  • Why is a DisclosureGap® policy needed if the target company in the transaction intends to purchase “run-off” management and fiduciary liability insurance (“Run-Off”)?
    Although there is some over-lap between coverage under a DisclosureGap® policy and "Run-Off" policies, there are significant differences. Without enumerating all of these differences (and given that the scope of Run-Off coverage can vary widely based upon the policy wording used), some common differences between a DisclosureGap® policy and Run-Off are: (1) the identity of the insureds. Insureds (or insured capacity) under a Run-Off policy do not include shareholders of the target that ultimately have the responsibility for the indemnification obligation that responds in the event of the breach of or inaccuracy in a representation or warranty. In fact, the directors and officers of the target are rarely signatories to, or parties to, a transaction agreement. A DisclosureGap® policy is more accurately tailored to include the relevant buyer or seller parties as insureds; (2) While under a Run-Off policy, liability of the relevant insured must be demonstrated before there can be a financial recovery from that insured. Damages under a transaction agreement are, with a few exceptions, generally contractually determined under the terms of the indemnification obligation. Many Run-Off policies contain contractual exclusions; and (3) Some exclusions, such as the bodily injury/property damage exclusion and the contractual exclusion mentioned in (2) above, eliminate coverage for loss incurred by an insured as a result of the breach of or inaccuracy in many warranties and indemnities.
  • How long does it take Ambridge to perform a preliminary review of a DisclosureGap® policy submission?
    Generally we can provide preliminary terms within 24 hours. Completion of full underwriting is dependent on how quickly detailed information is provided to Ambridge Partners. Ambridge Partners frequently can offer bindable terms within several days after receipt of the initial submission.
  • What type of underwriting submission does Ambridge require to perform a preliminary review of a DisclosureGap® policy submission?
    Please provide the information set out in Ambridge Partners' DisclosureGap® Warranty & Indemnity Insurance application. Alternatively please provide the following information to receive preliminary terms: (1) Copy of latest Purchase and Sale Agreement together with all available Schedules & Exhibits; (2) If available, a copy of the offering memorandum or circular distributed to potential bidders, which describes the company and its operations together for potential bidders; (3) A list of shareholders of the target company together with percentage of shares held; and (4) Copy of most recent audited financial statements for the target company.