The transactional risk insurance market continues to remain highly competitive, driving lower premium rates, stronger coverage terms with the added availability of several optional extensions to policy coverage.
Queries received to date suggest that policyholders are keen to better understand these extensions to cover as well as the broad terms under which additional coverage may be available.
Over the last year, we have noticed elevated interest from policyholders and their advisors in the New Breach Cover (NBC) extension. NBC provides cover for breaches of the insured warranties that occur and are discovered between signing and completion. These breaches which occur and are discovered post-signing and pre-completion, are typically excluded under a standard W&I Policy as they would constitute disclosed breaches for the purposes of the completion No Claims Declaration (NCD).
The availability of NBC is usually considered by insurers on a case-by-case basis and is subject to their risk appetite. Appetite is often impacted by an extended period between signing and completion, the risk profile of the target business, and the transaction dynamics.
Insurers offering NBC 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 (between signing and completion).
- 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.
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 Breaches.
Despite the recent increase in queries, it should be noted that NBC is not a new policy extension in the W&I market and has always been considered by insurers subject to underwriting comfort. In this softer market however, it is more willingly offered by insurers in comparison to previous years.
Please contact Bellrock’s Transaction (M&A) and Contingent Risks Team for an illustration of how NBC may operate in practice and to discuss your needs.
