When a buyer in a Merger and Acquisition (M&A) transaction seeks to obtain representations and warranties insurance (RWI), one of the key steps is the underwriting call. This call is a critical part of the insurer’s diligence process, where the underwriters assess the risks involved in the deal before issuing the policy. Preparation for this call can significantly impact the coverage obtained and the efficiency of the underwriting process. Below are insights and tips to help navigate this stage effectively.
Understanding the Underwriting Call
The underwriting call typically takes place after the insurer has reviewed the buyer’s due diligence materials and before finalizing the insurance policy. The call involves representatives from the insurer, the insured party (usually the buyer), their legal counsel, and sometimes financial and tax advisors. The primary objective is to ensure that the buyer has conducted thorough due diligence and to identify any areas of heightened risk. Since RWI covers breaches of representations and warranties in the acquisition agreement, the focus is strictly on the target’s historical operations, not post-close plans or improvements.
Key Areas of Focus
Underwriters tend to concentrate on specific aspects of the deal, including:
- Financial Due Diligence – Reviewing quality of earnings, working capital adjustments, and debt obligations.
- Legal Due Diligence – Examining material contracts, regulatory compliance, employment matters, and litigation risks.
- Tax Diligence – Identifying potential tax liabilities and structuring risks.
- Operational Risks – Understanding supply chain dependencies, customer concentration, and cybersecurity vulnerabilities.
- Underlying Insurance – Evaluating historical Errors & Omissions, cyber, and other coverage, loss history, and prior acts coverage on claims-made policies.
How to Prepare for the Call
Effective preparation can streamline the process and help secure broader coverage. Key steps include:
- Ensuring Robust Due Diligence – Underwriters will scrutinize the depth and quality of diligence performed. A well-documented diligence process with clear issue tracking will instill confidence in the insurer. Be prepared to explain how specific risks were assessed through independent diligence efforts rather than relying on the seller’s warranties.
- Understanding the Transaction – Participants should be able to articulate the strategic rationale for the acquisition, key financial and operational drivers, and any identified risks. Since the insurer has spent less time on diligence, patience and collaboration are essential.
- Coordinating with Advisors and Assigning Roles – Aside from the lead legal counsel, third-party advisors should be scheduled for specific time blocks for their respective sections. Designating a lead for each topic helps avoid multiple (or different) responses to the same question.
- Addressing Known Risks Proactively – If there are red flags (e.g., pending litigation, regulatory matters), having clear explanations for risk mitigation can be beneficial.
- Ensuring the Latest Purchase Agreement and Disclosure Schedules Are Available – The insurer may ask specific questions about these documents, so all parties should work from the most recent versions.
- Being Prepared to Discuss Materiality – Since RWI policies often include a materiality scrape, underwriters may ask whether the seller disclosed items without regard to materiality. Certain areas may not have been reviewed because, given the deal size and retention level, the risk was deemed immaterial.
- Identifying the Buyer’s Deal Team – Insurers always ask for the two to three buyer representatives most involved in the transaction, as breaches known to these individuals are excluded from coverage. The insurer assumes those answering underwriting questions are the designated deal team members.
- Providing Written Follow-Ups When Necessary – If a question cannot be answered during the call, it is best to state that a response will be provided in writing post-call rather than speculating.
- Understanding That Open Items Will Be Tracked – The underwriter and broker will keep notes and circulate an open items list after the call.
Common Pitfalls to Avoid
- Inconsistent Responses – If different advisors provide conflicting answers, it raises red flags for the insurer.
- Lack of Preparation – An unorganized or vague discussion can lead to narrower coverage or higher premiums.
- Over-Sharing Information – While transparency is key, responses to agenda topics and questions from the insurer should be short, sweet and accurate.
- Relying on Seller Warranties – The insurer is looking for independent diligence, not reliance on seller representations.
Final Thoughts
A well-handled underwriting call can mean the difference between robust coverage and limited protections. By preparing thoroughly, aligning with advisors, and anticipating underwriters’ concerns, deal participants can help ensure a smooth and successful process.
