Posts Tagged ‘Insurance’

Multiple-Based Damage Claims Under Representation & Warranty Insurance

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday November 26, 2013 at 9:16 am
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Editor’s Note: The following post comes to us from Jeremy S. Liss, partner focusing on capital markets and mergers and acquisitions at Kirkland & Ellis LLP, and is based on a Kirkland publication by Mr. Liss, Markus P. Bolsinger, and Michael J. Snow.

Private equity funds are increasingly using representations and warranties (R&W) insurance and related products (such as tax, specific litigation and other contingent liability insurance) in connection with acquisitions as they become more familiar with the product and its advantages. [1] Acquirors considering R&W insurance frequently raise concerns about the claims process and claims experience. A recent claim against a policy issued by Concord Specialty Risk (Concord) both provides an example of an insured’s positive claims experience and highlights the possibility for a buyer to recover multiple-based damages under R&W insurance.

R&W Insurance Advantages

Under an acquisition-oriented R&W policy, the insurance company agrees to insure the buyer against loss arising out of breaches of the seller’s representations and warranties. The insurer’s assumption of representation and warranty risk can result in better contract terms for both buyer and seller. For example, the seller may agree to make broader representations and warranties if buyer’s primary recourse for breach is against the insurance policy, and the buyer may agree to a lower cap on seller’s post-closing indemnification exposure as it will have recourse against the insurance policy. In addition, R&W insurance often simplifies negotiations between buyer and seller, resulting in a more amicable, cost-effective and efficient process.

…continue reading: Multiple-Based Damage Claims Under Representation & Warranty Insurance

FDIC Cautions Financial Institutions Regarding Increase in D&O Insurance Exclusions

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Saturday November 9, 2013 at 9:07 am
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Editor’s Note: The following post comes to us from John Dugan, partner and chair of the Financial Institutions Group at Covington & Burling LLP, and is based on a Covington & Burling E-Alert.

The FDIC last week issued a Financial Institution Letter advising financial institutions and their directors and officers of the increased use of exclusionary terms or provisions in D&O policies, and the resulting increased risk of uninsured personal civil liability for directors and officers. (FIL-47-2013, October 10, 2013).

The FDIC Letter urges the directors of financial institutions to make well-informed choices about D&O coverage, including consideration of costs and benefits, exclusions and other restrictive terms in proposed policies, and the implications for personal financial liability for directors and officers.

D&O insurance is a critical asset for financial institutions and their directors and officers, and the FDIC Letter expressly affirms that the purchase of D&O insurance serves a valid business purpose. The FDIC’s Letter is also a timely reminder that the D&O insurance market is in constant flux and that—in addition to seeking advice from insurance brokers—directors should consider seeking advice from experienced coverage counsel to gain a better understanding of the potential impact of restrictive provisions in proposed policies.

…continue reading: FDIC Cautions Financial Institutions Regarding Increase in D&O Insurance Exclusions

NY State Department of Financial Services at the One-Year Mark

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday May 28, 2013 at 9:21 am
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Editor’s Note: The following post comes to us from Jayant W. Tambe, partner focusing on litigation concerning securities, derivatives, and other financial products at Jones Day, and is based on a Jones Day commentary; the full text, including footnotes, is available here.

Since the New York State Department of Financial Services (“DFS”) began operations in late 2011, the agency appears to have lived up to its billing as an activist regulator of insurers and financial institutions. DFS has taken on several novel issues and will likely continue to do so. Insurers and financial institutions doing business in New York should keep DFS on their radar given the scope of its regulatory mandate and its initial enforcement activities since inception. Institutions outside New York may also want to monitor DFS’s initiatives, which may pique the interest of federal or state law enforcement and regulatory agencies in other jurisdictions and lead to similar or parallel initiatives.

DFS’s Actions Since Inception

On October 3, 2011, the former New York State Banking and Insurance Departments were combined to create DFS. The 4,400 entities DFS supervises have about $6.2 trillion in assets and include all insurance companies in New York, all depository institutions chartered in New York, the majority of United States-based branches and agencies of foreign banking institutions, mortgage brokers in New York, and other financial service providers.

…continue reading: NY State Department of Financial Services at the One-Year Mark

M&A Representations and Warranties Insurance: Tips for Buyers and Sellers

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday May 1, 2013 at 9:14 am
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Editor’s Note: The following post comes to us from Paul A. Ferrillo, counsel at Weil, Gotshal & Manges LLP specializing in complex securities and business litigation, and is based on an article by Mr. Ferrillo and Joseph T. Verdesca that first appeared in D&O Diary.

No less than two years ago, had one tried to initiate a conversation with a Private Equity Sponsor or an M&A lawyer regarding M&A “reps and warranties” insurance (i.e., insurance designed to expressly provide insurance coverage for the breach of a representation or a warranty contained in a Purchase and Sale Agreement, in addition to or as a replacement for a contractual indemnity), one might have gotten a shrug of the shoulders or a polite response to the effect of “let’s try to negotiate around the problem instead.” Perhaps because it was misunderstood or perhaps because it had not yet hit its stride in terms of breadth of coverage, reps and warranties insurance was hardly ever used to close deals. Like Harry Potter, it was the poor stepchild often left in the closet.

Today that is no longer the case. One global insurance broker with whom we work notes that over $4 billion in reps and warranties insurance worldwide was bound last year, of which $1.4 billion thereof was bound in the US and $2.1 billion thereof was bound in the EU. Such broker’s US-based reps and warranties writings nearly doubled from 2011 and 2012. Reps and warranties insurance has become an important tool to close deals that might not otherwise get done. This post is meant to highlight how reps and warranties insurance may be of use to you in winning bids and finding means of closing deals in today’s challenging environment.

…continue reading: M&A Representations and Warranties Insurance: Tips for Buyers and Sellers

SEC Division of Investment Management Key Considerations

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Sunday November 25, 2012 at 9:15 am
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Editor’s Note: The following post comes to us from Norm Champ, director of the Division of Investment Management at the U.S. Securities and Exchange Commission. This post is based on Mr. Champ’s remarks at the ALI CLE 2012 Conference on Life Insurance Company Products, which are available here. The views expressed in this post are those of Mr. Champ and do not necessarily reflect those of the Securities and Exchange Commission, the Division of Investment Management, or the Staff.

I. Introduction

These are uncertain times for our nation’s investors and for those who issue and sell investment products, including variable insurance. A positive sign is that assets in variable annuities, at almost $1.6 trillion, remain near their all-time high. [1] In addition, the retirement income solutions offered by the industry are designed to address the needs of the many investors moving toward retirement in today’s uncertain market environment. However, there are significant challenges facing the business, particularly those presented by the persistent low interest rate environment and by volatile equity markets both here and abroad.

The Division has observed the industry undertaking several initiatives to address these challenges and curtail risk exposure in the contracts being offered. In addition, some insurers have chosen to exit the business. An industry on solid financial footing is important for investors, who rely on insurers’ ability to pay promised benefits. At the same time, some contract changes are not good for investors. For example, many recent changes have reduced benefits for new investors. Other changes have limited the ability of existing contract owners to make additional payments into their contracts in order to take advantage of the benefits of those contracts.

…continue reading: SEC Division of Investment Management Key Considerations

Delaware Supreme Court Rules on Excess Insurer’s Coverage Obligations

Posted by Warren Stern, Wachtell, Lipton, Rosen & Katz, on Thursday September 27, 2012 at 8:53 am
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Editor’s Note: Warren Stern is Of Counsel at Wachtell, Lipton, Rosen & Katz, where he concentrates on corporate and securities litigation. This post is based on a Wachtell Lipton memorandum by Mr. Stern, Martin J.E. Arms and Caitlin A. Donovan. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

On September 7, 2012, the Supreme Court of Delaware, applying California law, ruled that an excess insurer of Intel had no payment obligation even after Intel’s out-of-pocket defense costs, combined with Intel’s prior settlement with an underlying insurer, exceeded the underlying insurer’s policy limits — notwithstanding a provision in the excess insurer’s policy providing that coverage would apply when “the insured or the insured’s underlying insurance has paid or is obligated to pay the full amount” of the underlying insurer’s policy limits. Intel Corp. v. Am. Guar. & Liab. Ins. Co., et al., No. 692, 2011 (Del. Sept. 7, 2012).

This dispute arose from antitrust litigation that was brought against Intel and for which Intel sought reimbursement for defense costs from its insurers. A small primary policy was quickly exhausted and Intel then entered into coverage litigation with XL, its first excess insurer, that was ultimately settled for $27.5 million of XL’s $50 million policy limits. Having incurred significantly more than $50 million in defense costs, Intel then turned to its second excess insurer, American Guarantee & Liability Insurance Company (“AGLI”), for reimbursements for defense costs in excess of XL’s policy limits. AGLI refused coverage and litigation followed.

…continue reading: Delaware Supreme Court Rules on Excess Insurer’s Coverage Obligations

The Economics of Credit Default Swaps

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Friday July 29, 2011 at 9:08 am
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Editor’s Note: The following post comes to us from Robert Jarrow, Professor of Finance at Cornell University.

Credit default swaps (CDS) are term insurance contracts written on the notional value of an outstanding bond. In the paper, The Economics of Credit Default Swaps, forthcoming in the Annual Review of Financial Economics, I study the economics of CDS using the economics of insurance literature as a basis for analysis. The first CDS were traded by JP Morgan in 1995. Since that time, CDS trading has grown dramatically. CDS contracts trade in the over-the-counter derivatives markets which is only loosely regulated. The CDS market exhibited exponential growth between 2001 and 2007. At its 2007 peak, total outstanding notional for CDS was over 62 trillion dollars. After the crisis, however, these numbers have halved to just over 30 trillion dollars in 2009. Most of this change in outstanding notional has occurred through “portfolio compression” as demanded by the regulators where long and short credit derivative positions on the same underlying credit entity held by the same institution are netted. The reduction is not due to decreased trading activity in CDS. This assertion is supported by the relatively stable outstanding notional of equity and interest rate and currency derivatives over this same time span.

…continue reading: The Economics of Credit Default Swaps

Creditor Mandated Purchases of Corporate Insurance

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Friday August 6, 2010 at 9:50 am
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Editor’s Note: The following post comes to us from Brian Cheyne and Greg Nini of the Insurance and Risk Management Department at the University of Pennsylvania.

In our paper, Creditor Mandated Purchases of Corporate Insurance, which was recently made publicly available on SSRN, we provide the first large-sample evidence on the use and nature of insurance requirements in credit agreements for publicly-traded companies. We show that lenders nearly always mandate that borrowers have some form of insurance and in many cases tailor the requirement to the borrower’s specific situation. In addition to a requirement simply to have insurance, credit agreements also frequently include four additional provisions: (1) a requirement that the borrower purchase specific types of coverage, such as liability or property insurance; (2) a requirement that the lender be named as an additional loss payee; (3) a requirement that any proceeds from insurance payments be used to pay down loan balances; and (4) explicit permission that the borrower may self-insure. Given that over three-quarters of public firms use credit agreements of the type we study (Sufi, 2007), creditor mandated purchases of insurance are indeed an important source to explain the depth and variety of corporate insurance that we see in practice.

…continue reading: Creditor Mandated Purchases of Corporate Insurance

The Debate Over Federal Insurance Regulation

Posted by Richard J. Sandler, Davis Polk & Wardwell LLP, on Wednesday April 22, 2009 at 2:03 pm
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Editor’s Note: This post is based on a client memorandum by Richard J. Sandler, Ethan T. James, and Reena Agrawal Sahni of Davis Polk & Wardwell.

In March 2008, the Paulson Treasury issued its Blueprint for a Modernized Financial Regulatory Structure, in which Treasury recommended the establishment of a federal insurance regulatory structure to provide for the creation of an optional federal charter. The Financial Services Roundtable has endorsed the concept of a national insurance regulator, noting that “just as the state/federal banking system works well for the industry and the economy—so too can a similar insurance system.” In recent Congressional testimony, Treasury Secretary Timothy Geithner has said that “there is a good case for introducing an optional federal charter for insurance companies.”

Recently, Representatives Ed Royce (R-CA) and Melissa Bean (D-IL) introduced the National Insurance Consumer Protection Act (“NICPA”), the third attempt in less than three years to create federal insurance regulation. Not everyone thinks federal insurance regulation is an idea whose time has come, however. The CEO of the National Association of Insurance Commissioners (the “NAIC”), Therese Vaughan, recently testified in Congress that “[t]he state-based insurance regulatory system is one of critical checks and balances, where the perils of a single point of failure and omnipotent decision making are eliminated.” The Illinois Director of Insurance, Michael McRaith, in his Congressional testimony characterized the optional federal charter as “a solution in search of a problem.”

Our memorandum entitled “The Debate Over Federal Insurance Regulation” uses NICPA as a filter through which to examine the likely features of any federal insurance regulatory regime; the regulation of insurance holding companies under a federal system and how that compares to state insurance regulation, and to banking regulation, on which it is largely patterned; and how such a regime may fit into the current regulatory reform framework.

The memorandum is available here.

The Trilateral Dilemma in Financial Regulation

Posted by Howell Jackson, Harvard Law School, on Wednesday February 25, 2009 at 1:04 pm
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Editor’s Note: This post is by Howell Jackson of Harvard Law School.

My recent article “The Trilateral Dilemma in Financial Regulation” analyzes a practice — which I label the trilateral dilemma — existing in many different sections of the financial services industry, including mortgage lending, retirement savings, investment management, insurance brokering and banking services. The practice arises in the context of a consumer seeking the recommendation of a financial adviser for the purpose of choosing financial products and services. With surprising frequency, these advisers receive side payments or other forms of compensation from the firms that provide the product or service the advisers recommend. Many times these payments are not clearly disclosed to the consumers; often they are entirely secret.

In the article I describe how trilateral dilemmas have arisen in many different sections of the financial services industry. I then review the many different regulatory strategies that legislatures, courts and regulatory bodies have employed to address the problem. The modal regulatory response is the imposition of some sort of fiduciary duty on the financial advisor along with a generalized disclosure to consumers affected by the transaction. I then discuss a range of recurring analytical issues that arise in policy debates over trilateral dilemmas in a variety of settings, and I also evaluate the possibility that side payments and other forms of indirect compensation may in fact be an efficient or at least innocuous means of financing the cost of distributing financial products and services. The article concludes with some thoughts about the implications of my analysis for devising regulatory responses and for the role that consumer education might play in helping consumers work through these difficulties.

The article is available here.

One specific — and highly controversial — example of the trilateral dilemma in the real estate context involves the payment of yield spread premiums by lending institutions to mortgage brokers for steering consumers towards particular loans. In a recent article entitled “Kickbacks or Compensation: The Case of Yield Spread Premiums“, Laurie Burlingame and I present an empirical study of approximately 3,000 mortgage financings of a major lending institution operating on a nationwide basis through both a network of independent mortgage brokers and some direct lending. The data for this study was obtained through discovery in litigation that was subsequently settled. The study offers a number of insights into the impact of yield spread premiums of mortgage broker compensation and borrower costs. In particular, the study suggests that for transactions involving yield spread premiums, mortgage brokers received substantially more compensation than they did in transactions without yield spread premiums. This estimated difference in mortgage broker compensation is statistically significant and robust to a variety of formulations.

Industry representatives have long argued that yield spread premiums are not harmful to consumers because these payments are recouped through lower direct payments to mortgage brokers. However, our analysis suggests that this claim is baseless, at least with respect to sample included in our database. With a high degree of statistical confidence and using multiple formulations, we can reject the proposition that consumers fully recoup the cost of yield spread premiums. Our best estimate is that consumers get less than 35 cents of value for every dollar of yield spread premiums, a very bad deal for consumers.

The article also provides evidence that the payment of yield spread premiums may allow mortgage brokers to engage in price discrimination among borrowers. The evidence suggests that yield spread premiums are not simply another form of mortgage broker compensation, but rather a unique form of compensation that allows mortgage brokers to extract excessive payments from many consumers. The article concludes with a discussion of the implications of the study, areas for regulatory focus, and proposals for regulatory reform.

The article is available here.

 
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