Insurance
What is Insurance? In this section, the Seller provides information regarding the insurance held by the Business. It is part of the Representations and Warranties of the Seller section.
The Representations and Warranties of Seller portion of the Agreement is used to save the Buyer time and money. Rather than require the Buyer to go through third parties to find certain information, the Seller provides the information and must reimburse the Buyer for any Losses it suffers if the information is false or misleading.
The Middle Ground: In this representation, the Seller provides copies of all current insurance policies relating to the Business, all historical and pending claims relating to those policies, and a description of how those claims were resolved. Additionally, the Seller represents that: (1) the Business carries all policies required by law and/or customarily carried by others in its industry, and those policies are in full force and effect; (2) the policy providers are financially solvent; (3) all past due premiums have been paid and there have been no lapses in coverage; (4) the policies are not subject to cancellation or a premium increase; and (5) the Seller is not otherwise in default pursuant to any of the policies. In the event that Seller is self-insured, the representation should describe the self-insurance arrangement.
Purpose: The information provided here allows the Buyer to assess the risks inherent in operating the Business, as well as the Seller’s response to those risks. More specifically, the disclosures indicate the extent to which risks to the Business materialize, while the representations help the Buyer understand industry risk management standards. In combination, the disclosures and representations allow the Buyer to determine how risk-averse the Seller is, and that is useful information for the Buyer to know if the Seller will remain involved with the Business after the sale.
Buyer Preference: The Buyer wants to include this representation even if it does not plan on continuing the insurance policies purchased by the Seller, because the information is useful for determining the appropriate level of insurance protection. The Buyer may agree to limit the time period for which past and pending claims must be disclosed, but it will want that period to be long enough to get a good sense of the insurance needs of the Business and include at least one business cycle if the Business is cyclical in nature.
Seller Preference: The Seller may try to exclude this representation if the Buyer will not be utilizing the insurance policies purchased by the Seller. If the Seller does agree to provide the representation, it will want to exclude subjective language such as whether the insurance coverage used in the past is “sufficient.” Furthermore, it will not want to include representations that rely on the actions of third parties to be accurate, such as attesting to the financial solvency of the insurance carriers. If those representations are included, the Seller wants to include knowledge qualifiers to limit the risk posed by unknown circumstances or information.
Differences in a Stock Sale Transaction Structure: None.
