Original

Insights

R&W insurance facilitates transactions by shifting all or some of the Seller’s indemnification obligations for breaches of representations to a third-party, the insurance markets, benefiting both Buyer and Seller in most cases.

Benefits of R&W Insurance

Allows Buyers to:

  • Enhance indemnification package for limits, survival period and/or overall coverage terms not provided for under the purchase agreement
  • Distinguish bid in an auction by providing favorable/minimal indemnification package to Seller
  • Eliminate credit concerns when Buyer looks to recover losses against Seller

Allows Sellers to:

  • Limit and/or minimize the indemnification package offered to Buyers in a competitive scenario
  • Accomplish quicker and cleaner exit
  • Distribute sales proceeds to LP’s and investors earlier while limiting the risk of claw-backs
  • Protect passive sellers not actively involved in day-to-day business operations
  • Back-stop losses against potential claims whereby Buyer already negotiated a fulsome indemnification/escrow package – including joint and several liability

Typical Policy Features

  • Policies are heavily customized and intended to fit back-to-back with the parameters (caps, baskets, survival, etc.) and match the indemnification language in the transaction agreement
  • Premium generally ranges from 2.0-3.5% of the policy limits
  • Retention/deductibles under the policy generally fall between 1.0-2.0% of the transaction value 
  • Policy “Knowledge Exclusion” is typically limited to:
    • Buyer Policy: Actual knowledge, limited to Buyer’s deal team, of pre-closing items that would give rise to a breach (typically already scheduled)
    • Seller Policy: Any intentional or dishonest representations by the Seller (fraud)
  • Commonly excluded matters include items on the disclosure schedules, forward looking statements, covenants, and adequacy of pension plans
  • Environmental matters are typically covered by a R&W policy but in some cases may be excluded by some insurers, depending on the risk exposure and environmental diligence reports.