The transactional risk insurance market continues to remain highly competitive, driving lower premium rates, stronger coverage terms and sees the availability of several policy enhancements by way of endorsement.
Over the last year, we have noticed elevated interest from policyholders and their advisors in New Known Breach Cover (NKBC). The queries which we have received to date suggest that policyholders are keen to better understand this endorsement to cover as well as the broad terms under which coverage may be available.
New Known Breaches are breaches of the insured warranties that occur and are discovered between signing and completion. Breaches which occur and are discovered post signing and pre-completion are usually excluded under a standard W&I Policy as they would constitute disclosed breaches for purposes of the completion No Claims Declaration (NCD). By way of clarification, breaches of signing warranties that occur before or at signing and are discovered post policy inception (i.e. prior to completion), would not be captured on the signing NCD. These breaches would be covered under a standard W&I policy and are not New Known Breaches.
Despite our recent increase in queries, it should be noted that NKBC is not a new cover for the W&I market and has always been considered by insurers subject to underwriting comfort. As the market softens however, it is more willingly offered by insurers in comparison to previous years.
The availability of NKBC is usually considered on a case-by-case basis and is subject to an insurer’s risk appetite. Appetite is often impacted by an extended period between signing and completion, the risk profile of the target business and the transaction itself.
Insurers offering NKBC will do so subject to underwriting comfort and reasonably standard terms which may include the following:
- An additional premium of 10-20% above the quoted premium for a 30-day period.
- An exclusion for claims resulting from non-compliance by the sellers with pre-closing covenants.
- An exclusion for breaches that constitute a material adverse event/change (MAC) or the requirement that the policyholder exercises any such MAC right of termination under the terms of the sale agreement.
Extensions to the 30-day period are not automatic. They are subject to both an additional underwriting review and premium as well as typically requiring a new breach NCD at the extension date. Insurers assess whether to continue providing cover for new breaches past the initial period at their discretion and an extension is not guaranteed.
Please contact Bellrock’s Transaction (M&A) and Contingent Risks Team for a practical illustration of how NKBC may operate in practice and to discuss your needs.
