INSURANCE: Who Pays When a Deal Turns Sour?

When a proposed waste company buy-out sputters and dies, the lawyers, accountants and other consultants who worked on behalf of the seller still will be entitled to their fees. If the seller planned on using part of the proceeds to pay these costs, but has no gains to divvy, the failed deal ends up producing only a cash drain.

So how does a seller handle the risk of a would-be buyer losing financing or not meeting conditions for closing? What if the buyer finds a more attractive target or simply gets cold feet? Or what if a state or federal regulatory agency attempts to block the transaction or insists on unreasonable preconditions for approval?

The failure rate for publicly reported proposed mergers or acquisitions is about 12 percent, according to research data. Lost transaction costs in a failed deal are estimated at approximately 1 percent of the deal's value. Who can say for sure how many dollars are lost in the overwhelming majority of transactions that aren't reported?

The insurance industry says it can come to the rescue with a product known as aborted-bid-cost (ABC) coverage. Under this kind of policy, the insured party recoups its direct costs related to an agreed bid, merger, acquisition, sell-off or other transaction that prematurely ends for reasons beyond the control of the insured.

Payment under the policy would be triggered by a defined event - for example, termination or other noncompletion of the proposed deal due to specified circumstances such as opposition from regulatory agencies or a default by the other party on one or more preclosing conditions, including necessary stockholder approval.

An ABC policy generally covers outside expenses customarily incurred in arranging and concluding typical mergers and acquisitions - legal and accounting fees, commercial and investment bank charges, and even lobbying firms' costs. Policyholders can recoup costs incurred as early as a year prior to the coverage's inception date. The coverage period extends until all of the transaction's details are completed or when the deal is aborted. Some extensions of the coverage period may be granted beyond the typical 12-month term.

Underwriters and insurance consultants advise businesses to submit their ABC applications immediately upon signing the transaction papers.