PlumBot: Bot: Creating new article from JSON

2026-03-15T16:31:41Z

Bot: Creating new article from JSON

New page

📝 '''Ordinary course of business covenant''' is a contractual provision commonly found in insurance [[Definition:Mergers and acquisitions (M&A) | M&A]] agreements that obligates the seller to operate the target insurance business in its normal, established manner during the period between signing and closing the transaction. This covenant prevents the seller from making material changes — such as altering [[Definition:Underwriting | underwriting]] guidelines, entering unusual [[Definition:Reinsurance | reinsurance]] arrangements, accelerating [[Definition:Claims management | claim settlements]], or modifying [[Definition:Reserving | reserve]] practices — that could diminish the value or character of the business the buyer expects to receive. In insurance deals, these covenants carry particular weight because the core asset being acquired is often an intangible stream of future [[Definition:Premium | premiums]], relationships, and risk portfolios that can be degraded quickly by departures from standard practice.

⚙️ Structuring an effective ordinary course covenant in an insurance transaction requires careful calibration. Broad, boilerplate language — such as "the business shall be conducted in the ordinary course consistent with past practice" — frequently proves insufficient because insurance operations are inherently dynamic: [[Definition:Renewal | renewal]] seasons, [[Definition:Catastrophe | catastrophe events]], regulatory changes, and market hardening or softening all demand responses that may look unusual in isolation but are entirely rational. As a result, well-drafted covenants in insurance deals typically include specific carve-outs and schedules that enumerate permitted actions alongside prohibited ones. A seller might be allowed to renew existing [[Definition:Reinsurance treaty | reinsurance treaties]] on commercially reasonable terms but prohibited from writing new classes of business, hiring senior executives above a salary threshold, or settling [[Definition:Large loss | large claims]] above a specified amount without the buyer's consent. Negotiating these thresholds is one of the most heavily contested aspects of insurance M&A documentation.

🔍 Breaches of ordinary course covenants can have significant consequences, potentially giving the buyer grounds to refuse to close, seek indemnification, or renegotiate the purchase price. In the insurance sector, where [[Definition:Loss reserve | loss reserves]] represent the largest liability on the [[Definition:Balance sheet | balance sheet]] and [[Definition:Policyholder | policyholder]] obligations are regulated, even seemingly minor operational changes during the interim period can have outsized financial implications. For example, if a seller accelerates the settlement of disputed claims at inflated amounts to clear its docket before closing, the buyer inherits a depleted reserve base. Regulators in jurisdictions such as the United States, the EU, and the UK also have an interest in ensuring that [[Definition:Change of control | change-of-control]] transitions do not disrupt policyholder protections, which adds another layer of scrutiny to interim conduct. The ordinary course covenant thus serves as the primary contractual mechanism for maintaining stability and accountability during what is often a months-long transition.

'''Related concepts:'''
{{Div col|colwidth=20em}}
* [[Definition:Ordinary course of business]]
* [[Definition:Material adverse change (MAC)]]
* [[Definition:Interim period]]
* [[Definition:Representations and warranties]]
* [[Definition:Change of control]]
* [[Definition:Purchase and sale agreement (PSA)]]
{{Div col end}}

Definition:Ordinary course of business covenant - Revision history

PlumBot: Bot: Creating new article from JSON