As an M&A consultant or broker-dealer / investment bank providing M&A advisory services, implementing a well-structured insurance program is critical. Navigating the different insurance solutions however can be a bit dizzying.

Before addressing specific policy terms and conditions, policyholders need to ensure they’re securing coverage on a proper form. While some M&A consulting may be performed by non-registered (broker-dealer) entities, higher level services are limited to registered broker-dealers / investment banks only. Whereas non-registered advisors may secure coverage on a properly tailored miscellaneous E&O insurance form, investment banks should, nearly always, secure coverage under an appropriate investment banking policy form.

Given that miscellaneous E&O policies routinely price lower than financial lines forms and carry lower retentions, one of the common errors we see, are investment banks securing coverage under these miscellaneous E&O policies in an effort to capitalize on the reduced premiums. Due to the fact that these policies are not intended for financial firms, they often carry jeopardized terms, such as regulatory exclusions and aggressive exclusions, such as those carving out coverage for any claims related to: 1) investment banking or broker dealer services, 2) recommending or managing investments, 3) fairness opinions and valuations, and/or 4) underwriting, placement, soliciting, or purchasing of debt or equity securities, or acting as a placement agent. Consider the problematic nature of such policy language - policies written to insure an investment bank’s M&A advising, that then go onto exclude claims related to services performed as an investment banker or broker dealer are at clear odds with one another and create ambiguity. Generally speaking, insurers often view these exclusions to apply only when such services are *required* to be performed by an investment bank or broker dealer, which not all M&A advisory services are. So coverage may in fact be intact, however policyholders need to ensure services are clearly defined and the boundaries of such policies clearly understood.

Additionally, depending on how these exclusions are drafted, how the policyholder’s organizations is structured, and how services are being provided, these exclusions can become implicated in unexpected ways. Consider an introducing broker that solicits or accepts orders but doesn’t handle any funds or act as a clearing broker. While these exclusions may not seem particularly concerning at first glance, it’s important to point out that the above exclusions preclude coverage for any claims “related to” those acts. Should the policyholder in question find themselves named alongside the transacting broker dealer, for a claim brought by investors of an acquisition, the insurer could decline coverage on the basis of deeming the claim to be “related to” the "selling of securities". The same hold true for situations in which an investment bank may not be performing their own valuations or fairness opinions - due to the fact that the exclusions can often contain broad preambles, and due to the fact that they may also lack clarifying language specifying that the valuations/opinions be issued by the insured, coverage may be severely jeopardized. In certain circumstances, insureds may be able to better tailor their policy by addressing specific language. For example, insurers may be able to make policy amendments to ensure vicarious liability for such acts are preserved, but these requests often must be made by the insured and ultimately accepted by the carrier.

Equally concerning, these exclusions can also become problematic for non-registered consultants as well. Poorly structured policies can also go one step further and mis-classify the insured services altogether, listing the entity as a “management consultant” with an endorsement that makes no such mention of M&A activities.

In addition to the recommendations provided by our previously published broker-dealer guide, here are some additional coverage questions all M&A advisors should be addressing when reviewing or placing coverage:

• Are all services properly accounted for? For non-registered M&A consultants, that often means ensuring the definition is broad enough to account for all of the services being provided (and reviewing the exclusions carefully). For broker dealers and investment banks however, it can get more complex. If providing fairness opinions and/or valuations, it’s critical that those are included, as many policies may carve out such services due the increased risk. Additionally, broker dealers that also maintain other services such as trading desks will need to ensure the policy is structured to provide coverage for such trading activities, including claims involving failure to supervise, and any costs incurred with trading errors.
• Are all entities accounted for, including any parent/holding co, broker-dealer entity and any other non-registered entities?
• Do the policies provide coverage for all forms of alternative dispute resolution? Some carriers appear to limit ADR solely to either mediation, or arbitration but fail to include both.
• How broad is the policy’s regulatory coverage? Are regulatory investigations/actions excluded entirely? Does the policy include those brought by self-regulatory agencies such as FINRA?
• Is the policy’s fraud exclusion acceptable? Broader forms will agree to provide defense costs until there is a final adjudication of guilt, whereas others will allow other fact finding to cease coverage, which can effectively eliminate the insured’s defense cost coverage early on in the claims process.
• Is the policy’s contractual exclusion acceptable? Given that nearly all services provided will be subject to a contract, overly broad contractual exclusions can be problematic. Any policy purchased, should ideally preserve coverage for contractual claims involving professional service failures.
• Are there any problematic choice of law or jurisdiction clauses? These are more common on foreign placed policies such as those out of Bermuda.
• Lastly, is D&O (directors and officers) liability insurance included as part of that overall insurance program? Whereas E&O insurance is squarely intended to cover claims brought by clients, D&O insurance can provide broader coverage for regulatory actions and claims brought by (non-client) 3rd parties.