Representation & Warranty Insurance

Representation & Warranty (R&W) insurance gives insureds the upper edge for Mergers & Acquisitions (M&A) transactions

Just a few years ago, if a Buyer or Seller came to the table with a R&W policy they had a distinct advantage. Today, without it, they are the underdog. Even for the experienced Buyers/Sellers, M&A transactions face hidden and unanticipated risk from inaccuracies and misrepresentations, resulting in significant post-closing financial loss.

What Is the Value of a Representation & Warranty Insurance Policy?

The R&W policy protects Buyers and Sellers from financial loss due to a breach in the sale agreement. It helps maximize shareholder value by promoting a robust auction, reduces escrow & indemnification requirements, and removes impediments to closing, allowing for immediate and full distributions to shareholders or lenders. R&W insurance is best suited for Private transactions between $20M – $1.5B, and the policy can be purchased by the Buyer or Seller.

Who Should Purchase a Representation & Warranty Policy?

  • Private Enterprise companies that are expanding or consolidating
  • Buyers and Sellers of companies and assets
  • Private Equity firms buying and selling Portfolio Companies
  • All industries qualify: Tech, Health Care, Biotech, Financial, Manufacturing, Service & Real Estate
  • Buyers investing in Foreign Assets
  • Investment Banks structuring the deal on behalf of the Buyer or Seller

Quick Coverage Facts

  • R&W insurance is best suited to Private Transactions between $20M – $1.5B
  • Policy is tailored to each individual Transaction starting with a base Buyer or Seller template
  • Marketplace has expanded significantly making the underwriting process more agile and competitive
  • Typical premium is 2.5% to 4% of the limit
  • Tax Liability is often a companion product
  • Typical limit is 10% of the deal
  • Other Transactional products are available for Tax Liability and Specific Contingencies (one-off risks such as changes in interpretation of a Regulator)
  • Aggregate market Premiums for Transactional Insurance skyrocketed to $200B in 2015

Benefits of a Buyer-Side Policy

Buyer-Side policies enable the buyer to recover financial losses directly from the insurer rather than going after the Seller for damages due to intentional and unintentional representations made by the Seller. Benefits to the Buyer:
  • Gives an edge over competition – distinguishes the bid by reducing the scope, duration, and limits of indemnification and escrow provisions
  • Meets Buyer’s interest in having a larger Escrow held by Seller
  • Protects against Fraud committed by the Seller
  • Reduces concerns about actually collecting the indemnification and escrow
  • Meets Fiduciary obligations to Shareholders
  • Protects against inaccuracies in facts and calculations involving the valuation of assets
  • Protects key relationships to move on to additional Transactions with the Seller
  • Avoids having to make a claim against key employees now employed after an acquisition

Benefits of a Seller-Side Policy

Seller-Side policies reimburse the Seller for indemnification amounts they become liable to pay the Buyer for allegations of misrepresentations in the sale.
  • Reduces or eliminates indemnification provisions and escrow reserves
  • Locks in proceeds of the sale and provides immediate distribution of funds to Shareholders
  • Broadens the potential bidders due to the security of indemnification and can help drive the sale price up
  • Protects Seller from having to return a portion of the sale proceeds
  • Seller can make a “clean-break” and avoid potential future liabilities
  • Allows Seller to pay down debt obligations
  • Supplements the Due Diligence and Disclosure process

Benefits to All Parties

  • Shifts Transactional risk from Buyers and Sellers to the Insurance company
  • Resolves impasses in the negotiations of the sale
  • Allows both parties to become comfortable with the scope, duration, and limits of indemnity or escrow
  • Helps the negotiation to move swiftly
  • Reduces overall costs by providing a level of confidence to both parties