COVID-19 Issues Appearing in Representation and Warranty Insurance Policies

Since the escalation of the COVID-19 pandemic, we’ve seen the emergence of proposed exclusions from coverage in representation and warranty insurance (RWI) policies.  For example, a buy-side policy found in a recently signed deal contains the following exclusion:

the inability to fulfil customer orders based on a lack of stock in the period after 5 months from Closing caused by disruptions to the Target Group’s supply chain as a result of the spread of the Novel Coronavirus, including, but not limited to, the failure of the Target Group’s suppliers to timely manufacture and ship the Target Group’s products due to labor shortages caused by, among other things, (a) the spread of the Novel Coronavirus among such supplier’s employees, (b) government enforced quarantines or (c) the election by such supplier’s employees to not appear for work out of fear of contracting the Novel Coronavirus;

While this example focuses on supply chain disruptions caused by the COVID-19 pandemic, other formulations of the policy exclusion we’ve seen are more broadly worded to include any disruption to the target company’s operations (including as a result of government stay-at-home or shelter-in-place orders) or to address decreased demand for the target’s products or services arising from COVID-19.

As part of the process for underwriting new RWI policies, carriers are inquiring into the due diligence conducted by the buyer on COVID-19 impacts on the target.  Though careful consideration should be given to tailor due diligence requests to the context of the target’s business, possible COVID-19 effects for buyers to investigate in due diligence include:  effects on the target’s business operations, access to the target’s facilities by employees and customers, supply chain disruptions, changes in demand for the target’s products or services and the target’s business continuity plans (including its IT continuity plan).

Finally, buyers proceeding to the closing of a transaction for which RWI was bound prior to the COVID-19 outbreak (with agreed-upon policy language that does not contain any COVID-19 related exclusions) should expect that, as part of the bring-down process with the carrier, the carrier will inquire as to the buyer’s knowledge of, and investigation into, COVID-19’s impacts on the target that have arisen in the interim period between signing and closing.  Disclosures by buyers resulting from such inquiry will also serve to reduce the insurer’s COVID-19 related risk, as those disclosures, to the extent they represent breaches of the seller’s representations and warranties, will become “Interim Breaches” that are automatically excluded from coverage.

Jon Van Horn

Jon is an experienced, business-focused M&A lawyer. He provides practical, actionable strategic advice to boards of directors and executives involved in M&A transactions. As a partner in Dorsey’s Mergers and Acquisitions practice group, Jon regularly represents purchasers and sellers in mergers and acquisition transactions, including negotiated business combinations and contested acquisition transactions.

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