M&A Insurance for Real Estate

Mergers and acquisitions (M&A) insurance continues to grow as a strategic tool on pure real estate deals as well as sales of operating businesses with valuable underlying real estate assets.

Key M&A insurance products for the real estate sector:

  • Warranty and Indemnity (W&I) insurance – protects against unknown breaches of general and tax warranties in a sale agreement and claims under a tax indemnity
  • Tax liability insurance – ring-fence identified tax liabilities which might crystallise post-completion, e.g. residency or trading vs investment risk, VAT treatment or stamp duty land tax challenge
  • Title insurance – address concerns over the title of assets and shareholding e.g. losses arising from missing deeds or enforcement by local authorities where work lacked requisite consents
  • Environmental insurance – covers the liability and sometimes clean-up costs associated with pollution

M&A insurance is a strategic tool not just a way of transferring risk.

The majority of insured real estate deals are structured with a £1 cap on the seller’s liability. This allows the seller to make a clean exit (enabling return of funds to investors) and allows the buyer to rely on the insurers’ security instead of a special purpose vehicle (SPV) with no assets or a real estate fund due to wind-up.

Key Deal Drivers

  • SPV structure
  • Wrapping of historic liabilities (ahead of fund wind-up)
  • Matters identified during due diligence (often tax)
  • Seller covenant strength
  • Retiring or multiple selling shareholders
  • Liquidating fund
  • General fund / Real Estate Investment Trust limitations – necessity to make a clean exit
  • Bid differentiator
  • Escrow replacement
  • Cross border deals

Policy Structure

Policy Excess: The attachment point of the insurance (the amount of loss the insured has to suffer before the policy responds) is often nil meaning the policy will exactly match the thresholds in the sale agreement (subject to a de minimis) 

Average W&I insurance policy excess as % of deal size in 2017

0.15%
Real Estate
0.58%
Non Real Estate
Price: premium rates are between 0.5 – 0.9% of the policy limit for a straightforward UK and northern European transaction.

Key Coverage for Real Estate

The policy will be tailored to the underlying transaction but please note:

  • Affirmative cover can be achieved for low risk issues identified in the due diligence process such as tax residency and trading vs investment (usually as part of the
    standard premium)
  • Fewer exclusions are typical: pension underfunding, bribery & corruption and condition of assets are usually removed as exclusions
  • Cover of environmental warranties is included as standard
  • Construction defects (defects in the design and construction of the buildings) are excluded as standard.

Case Studies

  • A German real estate investment company was looking to acquire a UK commercial property (held in a corporate structure) as a UK investment.
  • Competitive auction process with the seller requiring the successful bidder to source and fund a buyer’s W&I policy within a short exclusivity window.
  • JLT worked with a bidder and preferred insurer to agree a W&I policy to be finalised within a few days of exclusivity being granted, minimising execution risk.
  • Late in the process, the buyer’s tax advisers identified a potential liability relating to capital gains on the historic transfer of the property to the current seller.
  • JLT secured affirmative coverage from the insurer for these identified risks on top of the general warranty and tax covenant at a small additional premium.
  • Leading developer of student accommodation looking to sell a portfolio of properties through a competitive auction process with a target EV of £350m.
  • The motivation for using W&I was to ensure that the exiting sellers could limit their liability to a nominal level (£1) allowing them to return 100% funds to investors.
  • Given large number of interested parties, seller needed to maintain control of the W&I process until late in the auction once preferred bidders had been identified.
  • JLT worked with all deal advisors to establish W&I ground rules which bidders must adhere to, minimising potential conflicts.
  • A range of policy options were compiled in a report for bidders and uploaded to the data room and the winning bidder was then allowed to engage with JLT and their preferred insurer. The policy was bound when the deal signed within a week of exclusivity being granted.