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The Healthcare Investor Insights on Issues & Trends that Impact Investments in Healthcare & Life Science Businesses

R&W Insurance: A Market Update

Posted in Healthcare Services Investing

The next in our series of posts sharing key takeaways from panels at the Healthcare & Life Sciences Private Equity and Lending Conference discusses representations and warranties (R&W) insurance. It is authored by our colleagues Cindy Lu and Ann Dorsett.

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R&W Insurance: A Market Update

By Cindy Lu and Ann Dorsett

The R&W insurance market has evolved dramatically over the last several years, according to experts who spoke on a panel at the Annual Healthcare and Life Sciences Private Equity & Finance Conference in Chicago on February 20.

Experts included A.J. Kritzman, Senior Underwriter-Transactional Risk Insurance at Tokio Marine HCC, Gary Lewis, Managing Director at Cascade Partners, LLC, and Michael Wakefield, Vice President, Financial Services Division at McGriff, Seibels & Williams. Ann Dorsett, Counsel at McGuireWoods LLP moderated the panel.

Here are five key points from the panel discussion.

1. Activity in the R&W insurance (RWI) market has increased and evolved dramatically in recent years. In 2009, the industry saw forty policies with an average deal size of $15 million, and in 2018 there were 1,600 policies with an average deal size of $950 million. Just a few years ago, almost every deal required one percent retention unless the deal size was under $40 million. Today we encounter many deals with no seller indemnity. With all of this new activity, law firms have RWI specialists where such a position did not exist as of three years ago.

2. The RWI market for healthcare deals saw an upward trend in activity, and insurers that previously did not participate in this industry are now underwriting policies. Last year it was difficult to place policies for healthcare entities with significant governmental payors, but today the market consistently covers investments with Medicare and Medicaid reimbursement. Insurers expect that compliance issues, such as HIPAA, Stark, and AKS, have been sufficiently diligenced and that a billing and coding audit is performed by a reputable outside vendor when necessary.

3. There is a growing trend for buyers and sellers to seek RWI quotes at the pre-LOI stage. Sellers use quotes as an indicator to prospective bidders that coverage is attainable. Buyers seek quotes to make their bids more attractive. Pre-LOI quotes are not a guarantee of full coverage, however. Insurers still expect buyers to perform due diligence, and subject to that due diligence, there may be exclusions to coverage.

4. Currently, few insurers will cover breaches that occur or are discovered during the interim period (in transactions that are not simultaneous sign and close). Experts do not believe this will change as the current underwriting process is not set up to incur such risk.

5. The market is maturing and claims are being presented against policies. It will be interesting to see how such claims are treated and processed. The biggest hurdle confronting claims presentation remains proving the amount of damages actually incurred as a result of a breach, especially when the valuations rely on multiples of EBITDA.

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