Víctor Andrés Riadi Id.

Main considerations on the new trend in the market for contracting Civil Liability Insurance, either by the buyer or the seller in M&A operations, its function, types, hiring convenience and challenges.


Today, with the dynamism with which the economy and the different markets are progressing, Mergers and Acquisitions (M&A) operations have become increasingly frequent and normal, both in our country and abroad. To the extent that they comply with the applicable free competition regulations.

However, these operations constitute a slow and thorough process, in which you must have clear information regarding what is being traded (sale) and the risks that would entail any contingency that may arise during or after the negotiation process.

Indeed, M&A operations constitute an important mechanism used to grow the companies that exist in the market today, as well as to increase their presence and competitiveness within it. However, given the complexity of these operations, their due diligence and the risk they entail, it is increasingly important to understand the risks to be covered and how to do it. For example, in the case of an acquisition, being fully informed about the company you are trying to buy is essential, since a lack of information can lead to the buyer being exposed to significant damages or contingencies and the seller to not foreseen liability.

In relation to these risks, and as a way to expedite the management of these operations, the contracting of Civil Liability Insurance in matters of M&A arises as an alternative, since thanks to these, the risk between the contracting parties is reduced, by means of the transfer of said risk to an Insurance Company that is and who assumes it, in exchange for the payment of a certain premium.

For the same reason, on one hand, the Civil Liability Insurance in matters of M&A allows the seller to have a clean exit from the company of which he is a party, without having to worry about being exposed to claims or actions that could punish your civil responsibility by the buyer. On the other hand, for the latter, the Civil Liability Insurance in this matter allows it to have additional support against the contingencies to which it could be exposed if the seller did not have enough capital to respond, or in which the latter had a limited responsibility with respect to a contingency that could not be fully covered.

In this way, both the seller and the buyer can contract Civil Liability Insurance or, likewise, both can contract insurance of these characteristics in the same M&A transaction, which, although possible, is less frequent.



Just as in M&A operations there are two parties – buyer and seller – there are also two types of Civil Liability Insurances in this matter.

The Liability Insurance of the buyer (buyer-side policy), is the one that seek to protect the buyer from breaches of the guarantees provided by the seller, including possible frauds that he may have incurred; which even allows the buyer to proceed directly to collect the insurance, without first needing to claim against the seller. On the other hand, the seller’s Civil Liability Insurance (seller-side policy), is the one that is intended to cover the latter against possible claims that the buyer may make, and said risk or damage must be borne by an Insurance Company.



Regardless of the type of insurance that is contracted, its conditions must be taken into account, which vary both in terms of price and coverage, as well as in terms of exclusions and limitations.

Regarding the coverage, the Civil Liability Insurance in M&A operations generally relates to the price of the policy that has been contracted. Generally, said price is based on a percentage of the capital of the company that is sold or acquired, and that usually ranges between 10 and 30% of said capital; In this way, the higher the percentage of the price on the share capital that is contracted in the policy, the greater the coverage offered by it. However, we must not forget that, like any policy, it carries a deductible (retention/deductible), which corresponds to the amount that should always be the responsibility of the insured, regardless of the amount of the incident or contingency.

Likewise, it is also important to point out that, just as the Civil Liability Insurance offers coverage according to the price paid, they also have exclusions which correspond to contingencies that are not covered by the insurance in case they occur, and which are defined on a case-by-case basis depending on the nature of the M&A operation and the risks that each contracting party seeks to cover. In the same way, these policies are also not infinite in terms of coverage and, therefore, also include limits (gaps) against each contingency covered by it, so that once it exceeds the amount covered by the policy, the remainder must be supported by the insured.



Although we have observed that the Civil Liability Insurance in matters of M&A are useful when mitigating the risk in this type of operations, it is not less true that they also include certain aspects in which it could be improved.

Indeed, an example of the above would be that because the risk of the operation is transferred to an external company that is not part of the transaction, it invites the delivery of the information by the seller or the due diligence done by the buyer, it may be somewhat sloppy, providing this mechanism for negligent purposes by the insured, trusting that the risk of the transaction will be assumed by an external entity. In the same way, another negative aspect is that, due to the great competition that exists by the Insurance Companies regarding offers in this type of transactions, it becomes very difficult to set rates and premiums that are proportional to the amounts of risk that are It intends to cover, which does not always mean an attractive alternative for Insurance Companies when offering coverage in these types of transactions.



In our opinion, although Civil Liability Insurance in M&A operations is a useful tool to accelerate the process of its negotiation by transferring its risks to an external entity, it is still vital to know: /i/ how these work, /ii/ how due diligence can affect your coverage, and /iii/ the role that these types of insurance will occupy in the M&A operation, always trying to keep a fair proportionality between the price that you pay for the premium and the benefit that your hiring will report to the parties that subscribe it.

At Palma Edwards Veszpremy – PEV Abogados we are constantly attentive to the challenges that are generated in the corporate market, constantly looking for innovative and new alternatives to make corporate transactions go every day closer to the speed at which the market moves, without having to sacrifice the peace of mind of carrying out a transaction efficiently and safely.