insurance issues in transactions

1. Insurance Issues In Transactions The Intersection of Transactional Risk Insurance & Lawyers Professional Liability Insurance

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3. 2 Overview of Transactional Insurance Market

4. 3 Transactional Insurance Solutions

5. 4 Representations & Warranties Insurance �Premium/Transaction/Loss Information Information is anecdotal and incomplete. 2007 info. Is estimated. Est. 600 - 650 R&W policies underwritten in US to date In 2007, US market estimate for 5 active markets (up from 3 in 2006) is 70 R&W policies (up from 60 policies +/- in 2006) (Total internationally is approx 200+ policies) 2007 est. US premium is $65-70M on R&W alone. Average R&W ROL in 2006 � 3 - 4% in US Paid claims by active underwriters continue to be minimal; some insurers have had none Early experience associated with extremely low attachment points NOT experienced by currently active underwriters

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9. 8 Representations & Warranties Insurance

10. 9 Representations & Warranties Insurance

11. 10 Representations & Warranties Insurance

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16. 15 Tax Liability or Tax Opinion Insurance can help a company reduce or eliminate an unwanted or contingent liability arising from a successful challenge by the I.R.S. and/or other tax authority of a company�s tax treatment of a current, pending or historical transaction or investment. Tax Insurance

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19. 18 For example ��. Tax-free Reorganizations Section 355 Spin-Offs Tax-free Mergers Partnership Issues Employee Benefits Issues Section 280G Golden Parachute Issues Real estate acquisitions/sales NOLs Tax Credits (Synfuels, Low Income Housing, etc.) Tax Insurance

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23. 22 Litigation Buyout

24. 23 Litigation Buyout

25. 24 D&O, E&O, EPL, Fiduciary Products Liability Environmental/Asbestos Intellectual Property Casualty and X/S Casualty Tax Other (unlimited potential) Litigation Buyout

26. 25 Broad Coverage Insuring Clause = Specified Litigation or Claim(s) Limited Exclusions Hammer Clause Co-Insurance Premium Adjustments Claim Control Provisions Right to Associate Language Defense and Settlement Authority/Consent Claims Committee Litigation Buyout

27. 26 Litigation Buyout

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29. 28 Insurer�s generally hire outside due diligence counsel Assignment is to do a �second review� Did client�s firm look in the right places? Raise the right issues? Did client instruct counsel as it would in the absence of coverage? Due diligence reports (in R&W case) and opinions/memos (in the tax/special situations case) provide a road map Insurers are not seeking to rely on or create a right of subrogation against client�s advisors Law Firm�s Role in Underwriting Process

30. 29 Sample Due Diligence Request � R&W Insurance (Source:AIG) Draft acquisition agreement and related disclosure schedules; Financial statements of the seller and the acquired company or acquired business; Any offering memorandum or other informational materials prepared in connection with the transactions contemplated by the acquisition agreement; Any proxy statement or information statement prepared in connection with the transactions contemplated by the acquisition agreement; Buyer's due diligence request list and responses thereto, if in writing; Data room index or other due diligence document index prepared in connection with the transaction contemplated by the acquisition agreement; Third party reports, studies or opinions; Working group list; and Transaction timeline. Law Firm�s Role in Underwriting Process

31. 30 Are Firm�s Protecting Themselves? Big 4 are more vigilant than law firms Before even oral discussions Possibly too aggressive? Protections Waiver/nonreliance letters Waiver of subrogation Limitation of liability (UK � insurer market counsel) Law Firm�s Role in Underwriting Process

32. 31 Are Firm�s Protecting Themselves? Sample Subrogation Language � 2007 tax insurance �If the Insurer makes any payment of Loss under this Policy in respect of a Loss, the Insurer shall be subrogated, to the extent of that payment, to all the rights and remedies of the Insured in respect of that Loss, . . . . and the Insurer shall be entitled at its own volition to sue any parties other than the Insured and its affiliates in the name of the Insured, provided that the Insurer shall not have any rights of subrogation against (i) [Big 4 accounting firm], (ii) [Buyer�s Am Law 100 Law Firm] and [Seller�s Am Law 100 Law Firm] or any direct or indirect equity holder of the Insured Companies (except for intentional misconduct and recklessness). . . .� [emphasis added] Law Firm�s Role in Underwriting Process

33. 32 Scenario? 350 Lawyer Firm maintains $50M aggregate limit of professional liability insurance Client engages firm to write an opinion on the Federal tax treatment of the �tax-free� spin-off of a $5B division. If the IRS challenges the tax treatment and succeeds there will be tax at the corporate and shareholder levels > than $2B. Firm determines that it would be prudent to have higher limits of insurance given the potential liability should there be claims relating to the tax opinion work. Next Phase � Insuring the Law Firm for Transaction Specific Risk

34. 33 Options to Firm Purchase excess LPL insurance limits [traditional response] Purchase a special purpose LPL policy Dedicated limit for specific transaction and lawyers working on that matter Possible structure � 1-2 year policy which can be converted to a tail through the end of the statute of limitations Client purchases a tax indemnity policy Eliminates economic damage to transaction parties Law firm obtains nonreliance letter from insurers or waiver of subrogation Next Phase � Insuring the Law Firm for Transaction Specific Risk

35. 34 Some Considerations Who bears the cost? Traditional LPL coverage is annual, but transactional based responses can be tied to the relevant statute of limitations and charge a one-time premium Tax insurance just requires a bad result; LPL insurance requires an error or omission & a claim vs. the law firm An LPL based response may be a narrow risk for insurers and should attract greater limits at a lower cost Others? Next Phase � Insuring the Law Firm for Transaction Specific Risk

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