As the number of confirmed coronavirus (COVID-19) cases and related business disruptions continue to rise, representations and warranties insurers have begun to address the new market concerns posed by the virus with changes to their policies.
Many insurers are now proposing policy exclusions relating to COVID-19 exposures. Examples include exclusions for disruptions to the target’s business operations, supply chain, and adverse effects on related counterparties that are attributable to COVID-19, such as governmental mandates restricting hours of operation, including forced shutdowns or quarantines, labor shortages, reduction in revenues or customer demand for the target’s products or services, failure of suppliers to timely deliver components or raw materials, and related force majeure events.
In addition, insurers may seek to exclude representations and warranties added to the acquisition agreement relating directly to COVID-19 or the indirect risks posed by COVID-19. Examples include representations that the target company has no knowledge that any of its employees, independent contractors, or clients have been diagnosed with coronavirus disease, have exhibited symptoms of coronavirus disease, have traveled to specific countries identified by the CDC as having a “Level 3 Travel Health Notice” (such as China, Iran, South Korea, and Italy), or come into contact with any infected individuals.
As highlighted in our recent update, “The Short-Term Impact of Coronavirus on Deal Activity,” parties and insurers alike continue to evaluate and refine definitions of “Material Adverse Effect” and pre-closing covenants requiring the target company to operate “in the ordinary course of business” during the executory period to clarify the parties’ expectations with respect to potential COVID-19 impacts.
We expect that the impact of COVID-19 on representations and warranties insurance policies will continue to evolve at a rapid pace. The Ballard Spahr M&A Practice Group will continue to monitor and provide updates on this issue.
