Tech M&A – W&I risks, contingent risks and cyber insurance coverage

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Mergers and acquisitions in technology companies are not structured like all other business acquisitions. This is because the assets that make up the value of the relevant technology company are not comparable to those of traditional business models. It also means that there are special risks to consider in terms of insurance coverage: Risks in tech companies are not usually in tangible assets, environmental pollution, or production machinery. Rather, they are intangible risks resulting from copyright infringements, patent and license violations, and data protection violations. These particularities should be taken into account in particular in W&I insurance, which is still in great demand, contingent risk insurance and cyber insurance:

1. W&I insurance

For several years now, W&I insurance has has established itself in the German market as an extremely useful insurance product for preventive transaction risk coverage, especially for technology companies, which covers vendor warranties and indemnity claims. In these times of consistently low interest rates, it is mainly buyers who use this type of W&I insurance to protect themselves against their own financial losses due to breaches of collateral by the seller. It is only occasionally that the insurance is taken out by the seller himself in the sense of special liability insurance. Especially in the current economic situation, however, the seller in particular is advised to consider the benefits of W&I insurance at an early stage and, if necessary, to agree on its conclusion with the buyer, as such a solution may lead to a real win-win situation for all parties: The seller has a strong interest in limiting his liability risk, without the buyer applying a reduction in the purchase price for lack of contractual liability. However, the advantages of the transactional product also outweigh the disadvantages on the buyer’s side: despite the overall limitation of the seller’s liability (own exit), the buyer benefits from full guarantees regarding the target acquired through insurance. W&I, with a focus on intangible risks in the field of technological mergers and acquisitions.

However, for W&I insurance to realize its full added value, a number of legal peculiarities must be taken into account: W&I insurance only covers risks unknown to the transaction; In this regard, it is crucial for the insurer that a full disclosure process takes place (disclosure) and that the buyer has dealt intensively with the risks as part of the due diligence: due diligence must be carried out on the transaction in question with at least at least the same intensity and to the same extent that it would have been carried out within the framework of a transaction without W&I insurance. It is also advisable to contact the relevant insurers at an early stage with the help of a broker or to keep them updated on the current state of negotiations, as from the buyer’s point of view, the liability regime described in the purchase contract of the company must be negotiated not only with the seller but also, in the case of the traditional W&I product, with the insurer W&I. The main goal at this stage is to avoid gaps in liability or coverage. In addition, since the start of the pandemic, we have observed that W&I insurers include complete exclusions of Covid 19 in their policies or insist on increased disclosure in connection with the risks specific to Covid 19 existing with the target. As the pandemic remains limited in scope, the issue of Covid 19 exclusions or increased underwriting disclosures will continue to be a hot topic.

2. Risk insurance

W&I insurance reaches its limits in the case of specific risks that have been identified (i.e. known) as part of due diligence, generally in the areas of taxation or in the case of a imminent or already ongoing property litigation (such as data protection breaches). As a general rule, these identified risks, some of which have a low probability of occurrence but a high potential for damage as a result, represent a possible “dealbreaker”. A potential solution is offered by insurance against possible risks, which is still relatively unknown on the German market and covers an identified risk in addition to W&I insurance or as a “stand-alone” product. However, for the identified risk to be accepted by an insurer, insurers require detailed upstream preparation, including reliable quantification of the risk to be insured. This is done regularly by means of a specialized legal opinion, which is discussed with the broker and the insurer during calls to insurers.

3. Cyberinsurance

For technology companies (and especially those whose activities focus on IT / cloud solutions), the question of the suitability of a corresponding cyber insurance policy should be particularly asked in the context of a transaction. The stand-alone cyber insurances currently offered follow a modular concept, which sometimes turns out to be complex from a legal point of view. Depending on the needs of the insured, he can choose different cover modules, either in relation to his own risks (“first rank risks”) and / or in relation to the risk of becoming liable to third parties (“third party risks”). “).


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