Definition:Ordinary course covenant
📜 Ordinary course covenant is a contractual commitment in an insurance 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 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 regulatory approvals and 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 insurance carrier, this might mean prohibitions on writing materially new classes of business, altering reinsurance programs, changing reserving methodologies, entering unusual binding authority agreements, or making significant capital expenditures. For an MGA or broker, the restrictions often cover hiring or terminating senior staff, modifying commission structures, or restructuring key 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 due diligence. Some transactions supplement the covenant with a 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 indemnification for losses caused by the breach. In insurance deals, where the interim period may coincide with a major catastrophe season or regulatory reporting cycle, the covenant forces difficult conversations about what constitutes "ordinary" — renewing a 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.
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