Representations & Warranties Insurance Overview

Product Overview

Transactional Insurance Products facilitate transactions by bridging negotiating gaps between a buyer and seller.  The most commonly utilized product in the market is Representations & Warranties (R&W).  The common reasons to purchase R&W coverage are as follows:

  • Bridge negotiating gap between buyer and seller on indemnification
  • Enhance escrows, caps or survival period
  • Distinguish bid in an auction
  • Provide security when buyer is concerned about recouping indemnification

R&W policies allow sellers to:

  • Accomplish clean exit
  • Distribute sales proceeds to investors limiting the risk of a claw back
  • Protect passive sellers not involved in day-to-day business
  • Protect against indemnification claims when buyer demands larger and longer indemnification, more onerous representations and warranties

There are two types of R&W policies:

Seller Side Policy

  • Provides protection around contingent liabilities associated with selling a company
  • Protects the warrantors for any losses suffered in the event that a buyer brings a claim for breach of representation or warranty
  • Defense costs are included in the limit
  • Circumstances prompt the need for R&W include instances when a seller:
    • offers a monetary cap on the warranty liability which is much lower than the minimum a buyer will accept
    • has concerns regarding its ability to meet its financial obligations under the warranties
    • wishes to be relieved of future risk to facilitate a clean exit

Buyer Side Policy

  • Replaces the buyer's normal contractual recourse against the seller
  • The necessary level of recourse for the buyer when sellers are unable to offer sufficient protection
    • a R&W policy can be used to top-up this level in cases where internal approval for an acquisition may be subject to a predetermined level of recourse
  • A lending bank can be included as a loss payee as part of the bank's security package
    • an important enhancement for banks, especially for highly leveraged acquisitions
  • A strategic advantage in the context of an auction
    • the buyer can require a lower than usual indemnity from the sellers, thus distinguishing and enhancing the bid

The following blog is maintained with recent success stories of policies placed by Equity Risk Partners professionals.  You can follow this blog at http://transactionalriskcasestudies.tumblr.com: