Bass, Berry & Sims attorney Frank Pellegrino authored an article for the Nashville Business Journal’s special report on healthcare, in which he discussed the use of representation and warranties (R&W) insurance in healthcare mergers and acquisitions, and the benefits it could provide for both buyers and sellers.
“Buyers are typically able to negotiate more favorable terms on the representation and warranties contained in the definitive transaction agreement when R&W insurance is used because recourse against sellers for breaches of operational representations and warranties is otherwise limited,” Frank said. “In addition, R&W insurance can often provide more favorable indemnification remedies.”
Sellers reap a different benefit of utilizing R&W insurance which is the limitation of post-closing exposure they may encounter if there’s a breach in operational representation or warranty. Though there are some qualifications, sellers’ indemnification exposure for a breach in operational R&W is 50 percent of the retention amount under the insurance, which is typically 1 to 2 percent of the total enterprise value.
“While R&W insurance brings a lot of benefits to healthcare mergers and acquisitions, one challenge worth noting is that there can be exclusions from coverage,” Frank reported, adding that there are two categories the exclusions generally fall under:
- “‘Known’ risks that are uncovered during the due diligence process and,
- Risks that can potentially involve damages in excess of policy limits.”
The most common example of the risks that could exceed policy limits are related to government reimbursement, like Medicare and Medicaid.
The full article, “Making a Big Healthcare Deal? This Insurance Can Help,” was published by the Nashville Business Journal in the November 30, 2018 special report on healthcare and is available in print and online.