Exclusions
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Standard Exclusions
Most insurers will have a set list of non-negotiable standard exclusions which they include in every policy. These exclusions will be broad risky areas and, where the policy provider is a managing general agent, these exclusions are likely to have been imposed by the ultimate insurance providers to the agent.
Standard exclusions will include such items as asbestos and holiday pay to employees. These exclusions are often present because the insurance industry has historically paid out many claims relating to these risks so therefore it has now become common place to exclude it. Some argue that the effects of COVID-19 are likely to be added to that list of standard exclusions but so far this has not been observed in the W&I insurance industry.
Other standard exclusions can be related to the transaction dynamics of mergers and acquisitions. For example, acquisition agreements will generally have built-in mechanisms that affect the ultimate purchase price paid by the buyer such as the concept of “leakage” or a purchase price adjustment. These can allow the buyer to change the final purchase price dependant on issues and impacts affecting the target company. It therefore doesn’t make sense for insurers to allow the buyer to recover under the W&I policy when it can easily use the mechanisms specifically provided for this occasion within the acquisition agreement.
For example, if the buyer can rightfully use a purchase price adjustment to reduce the final purchase price by £100,000 due to an issue identified within the target then the insurer will want them to use that rather than the W&I policy. As a result, a common exclusion would be:
Any matter that is covered un the purchase price adjustment mechanism set forth in clause [X] of the acquisition agreement.
Standard exclusions are very rarely negotiable but some insurers may be willing to remove these exclusions subject to a discretionary increase in the premium.