Starting Underwriting
Also in this section
In order to progress into underwriting, the client of the broker (the entity to be ultimately insured) will select their preferred insurer. They will do this in conjunction with a recommendation from the broker. The selected insurer may not have offered the lowest insurance premium but might be offering the widest coverage position or have a very good reputation. There is no particular deadline to select an insurer. Some transactions may have the insurer selected a matter of days after receiving the quote report from the broker while other transactions may progress at a slower pace and not have an insurer selected for months after receiving the quote report.
Upon being notified by the broker that the insurer has been selected to provide the W&I, the insurer will draft and send its expense agreement. This is a 1-2 page contractual document that lays out the situation for when the insured will pay the insurer’s underwriting fee. The underwriting fee is designed to cover the insurer’s counsel fees incurred during underwriting and consequently is payable regardless of whether a policy is ultimately incepted.
If the insured has not received formal exclusivity yet, meaning that other companies are in the process of bidding for the target company, then the insurer is also likely to require a break fee. This break fee is designed to cover the internal costs of the insurer’s underwriting process and therefore is not payable if the policy does eventually incept. The break fee will be drafted into the wording of the expense agreement so the insured is able to sign one document in order to commence underwriting.
Insurers usually do not accept any amendments to their expense agreement since it is such a short and insignificant document but occasionally potential insureds will demand changes to the standard expense agreement terms. Once the expense agreement has been signed, underwriting can commence.