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📜 '''Ordinary course covenant''' is a contractual commitment in an insurance [[Definition:Mergers and acquisitions (M&A) | M&A]] transaction that requires the seller to continue operating the target business in its normal, day-to-day manner between the signing of the [[Definition:Share purchase agreement (SPA) | purchase agreement]] and the closing of the deal. The covenant protects the buyer from value erosion during what can be a lengthy interim period — particularly in insurance, where [[Definition:Regulatory approval | regulatory approvals]] and [[Definition:Change of control provision | change of control]] filings across multiple jurisdictions may extend the gap between signing and completion by several months or more.

⚙️ In practice, the ordinary course covenant restricts the target from taking actions outside the scope of its established business operations without the buyer's prior consent. For an [[Definition:Insurance carrier | insurance carrier]], this might mean prohibitions on writing materially new classes of [[Definition:Line of business | business]], altering [[Definition:Reinsurance | reinsurance]] programs, changing [[Definition:Reserving | reserving]] methodologies, entering unusual [[Definition:Binding authority agreement | binding authority agreements]], or making significant capital expenditures. For an [[Definition:Managing general agent (MGA) | MGA]] or [[Definition:Insurance broker | broker]], the restrictions often cover hiring or terminating senior staff, modifying commission structures, or restructuring key [[Definition:Delegated underwriting authority (DUA) | capacity provider]] relationships. The specific carve-outs and consent thresholds are heavily negotiated: sellers push for flexibility to respond to market conditions and regulatory requirements, while buyers seek tight controls to preserve the economic profile they underwrote during [[Definition:Due diligence | due diligence]]. Some transactions supplement the covenant with a [[Definition:Permitted leakage schedule | permitted leakage schedule]] that explicitly enumerates allowable cash outflows.

⚖️ Breaching an ordinary course covenant can have serious consequences, potentially giving the buyer grounds to delay or refuse to close the transaction, or to seek [[Definition:Indemnity | indemnification]] for losses caused by the breach. In insurance deals, where the interim period may coincide with a major [[Definition:Catastrophe event | catastrophe season]] or regulatory reporting cycle, the covenant forces difficult conversations about what constitutes "ordinary" — renewing a [[Definition:Catastrophe reinsurance | catastrophe reinsurance]] treaty at a higher rate may be routine market practice, yet the price change could be material enough to require buyer consent. Well-drafted ordinary course covenants anticipate these sector-specific tensions and build in sensible thresholds, ensuring the business remains competitive without exposing the buyer to unwelcome surprises at closing.

'''Related concepts:'''
{{Div col|colwidth=20em}}
* [[Definition:Share purchase agreement (SPA)]]
* [[Definition:Permitted leakage]]
* [[Definition:Condition precedent]]
* [[Definition:Material adverse change (MAC)]]
* [[Definition:Interim period]]
* [[Definition:Completion accounts]]
{{Div col end}}

Definition:Ordinary course covenant - Revision history

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