With all the current doom and gloom in SPACland, a ray of sunshine from an unlikely corner—D&O insurance carriers—is making our day a lot brighter.
For over two years, we have been making the case that representations and warranties insurance (RWI) would reduce the risk of busted deals, egregious flops, and consequent costly litigation for SPACs. Advocating for our SPAC clients, we have also argued that directors and officers (D&O) insurers should consider that risk reduction and offer pricing breaks on the high cost of SPAC D&O insurance.
With the incidence of expensive SPAC-related securities class actions on the rise, some leading D&O insurers have finally seen the light. They have come to understand that the willingness of the SPAC’s team to go through the placement of an RWI policy speaks to the team’s higher level of diligence, sophistication, and maturity.
Undergoing the additional vetting of their diligence by a third-party insurer demonstrates the team’s commitment to a deep understanding of their target and to safeguarding themselves and their investors from litigation, all of which reduces risk.
As a result, we are partnering with the market’s leading D&O SPAC insurer to launch a pilot program that will give our existing SPAC clients a chance to reduce their already pre-negotiated D&O tail pricing by up to 20%. This program may also be available to our future SPAC clients if they come to us during the pilot period. If you’re interested in joining the pilot, reach out to Emily Maier and Yelena Dunaevsky to see if you are a match for the program.
As an added bonus, the purchase of the RWI policy may also lead to better terms and reduced pricing on the combined company’s post-merger D&O policy.
What steps do SPAC teams need to take?
SPAC teams need to go through the RWI placement process and purchase an RWI policy ahead of their merger. Significant alterations to their existing diligence process will not be required. Most SPAC teams already run robust diligence exercises and would not find the process of an RWI underwriter review to be burdensome.
How will the RWI process be folded into the deal?
Same way it is folded into most private company M&A transactions. It would commence once the first draft of the merger agreement becomes available and could take as little as two weeks to complete.
Will the RWI policy be costly?
With current pricing rates running between 3% and 5% of limit bought, the RWI policy is surprisingly affordable. In many instances, the costs of the RWI policy would not exceed the savings on the D&O tail. In other words, the SPAC team and its target will get the benefit of a third-party vetted due diligence process and additional insurance coverage for no additional cash outflow.
For more details on how the RWI policy would work in the SPAC context, we invite you to read this recent SPAC Notebook post and to reach out to us for more information.
With the continuous evolution of the SPAC structure and market conditions, new, more flexible and efficient ways of insuring SPACs need to be adopted.
We are excited to see that D&O underwriters are starting to embrace creative ideas around SPAC insurance.
The use of RWI policies to reduce SPAC litigation risk and D&O insurance costs has been one of our creative ideas for some time now. And now that it is finally getting its due level of attention from D&O insurance carriers, we are looking forward to achieving market efficiencies and cost savings for our clients.
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