Transaction Insurance: A Critical Tool in M&A Deals with Ross Hamann

In this episode of The Transaction Abstract Podcast, Joe Hellman sat down with Ross Hamann, Executive Vice President at CAC Specialty, to explore the crucial role insurance plays in mergers and acquisition transactions.

What is Transaction Insurance?

Transaction insurance encompasses several products designed to facilitate deals by addressing risks that might otherwise prevent a successful closing. Hamann explains that CAC Specialty offers a comprehensive suite of solutions that extends beyond standard coverage.

As Hamann puts it, "We never want... a risk out there, be it known or unknown, cause a deal to not go through, because people... put a lot of time and effort into these deals, and so it's our responsibility to find insurance products to help get a deal done where it makes sense."

Key Insurance Solutions for Transactions

Hamann outlined three primary categories of transaction insurance that buyers and sellers should understand:

• Representation and Warranty Insurance - Covers unknown risks that might emerge post-transaction

• Contingent Risk Insurance - Addresses known litigation risks that could impact deal value

• Tax Insurance - Covers known tax risks where parties cannot get comfortable with the exposure

These specialized products can be valuable when traditional methods like escrows are insufficient. Instead of setting aside capital, insurance may provide a more cost-effective structure while offering protection against unforeseen liabilities.

Current Market Trends

The transaction insurance market has evolved significantly in recent years, with several notable developments:

• Expanded Deal Size Range - Previously limited to deals above $20 million enterprise value, now available for transactions as small as $1 million EV (Enterprise Value)

• More Competitive Pricing - Rates have decreased significantly, making coverage more affordable

• Claims Activity - About 20% of policies experience claims, with high severity rather than high frequency

• Market Competition - Multiple carriers now offering solutions creates competitive pricing

Hamann notes that for quality deals, "we can get up to 20 options at any given time," which continues to drive competitive rates in the current market.

Timing Considerations

While transaction insurance shouldn't slow down deal processes, proper implementation requires adequate planning. According to Hamann:

• Simple representation and warranty coverage can be arranged in about a week

• More complex solutions require additional time for proper diligence

• Early insurance involvement could help identify potential issues that may derail transactions

Hamann emphasizes that "the more time that we have, the more diligence we can have to really identify and uncover potential... go forward insurance issues that could cause the... transactional part to get delayed."

The Value of Specialized Expertise

CAC Specialty differentiates itself by building a team with diverse professional backgrounds, including former M&A attorneys who understand transactions from multiple perspectives. This approach enables them to structure creative solutions for challenging situations.

What sets them apart, in Hamann's words, is "having the professionals that have sat in your shoes... they see deals differently than most of the people that we compete against are trained in the insurance market, and it just creates a massively different outcome."

Hamann concludes by explaining their philosophy of problem-solving: "At the end of the day, that's why we get hired. We want them to think of us, ‘what are all the things we can do to get the deal done, versus what are the things that are going to kill the deal.’"

Listen to more episodes of The Transaction Abstract Podcast for additional insights on buying and selling businesses.