Representations and Warranties Insurance (“RWI”) protects a party from financial losses resulting from inaccuracies in the representations and warranties made about the Target Company or business in connection with transactions.

 

What is Covered?

  • Fundamental, General, and Tax representations and warranties
  • Other specified indemnities (financials / pre-closing tax)

 

Benefits of RWI

  • Transfer risk from both parties in the transaction
  • Provides access to the insurance industry’s capital to allow the transfer of certain transaction risks to the insurance market

 

Policy Options

In the market, 95% of policies are ‘‘Buy-Side Policies’’. A ‘‘Buy-Side Policy’’ indemnifies the buyer for sellers’ breach in reps and warranties in the Purchase and Sale Agreement. This is a first party policy used in situations where there is a gap between the buyer and seller with respect to escrows and indemnity obligations.

“Sell Side Policies” can also be purchased, which indemnifies the “Seller” for breaches in reps and warranties in the Purchase Agreement. This is a Third Party policy, where the Buyer would need to pursue the Seller to trigger a claim. Generally it will sit in excess of the Buyer’s [materiality] deductible (in the Purchase agreement – not the insurance term), and would include an exclusion for “fraud.”

 

Exclusions: What is Not Covered

It is important to consider what is not covered by RWI in the context of the transaction, standard exclusions are:

  • Actual knowledge of a breach (‘‘Actual Knowledge’’ defined as conscious awareness)
  • Projections or forward looking Statements
  • Adjustments to the purchase price related to working capital
  • Fines and penalties (except where insurable by law)
  • Unfunded or Underfunded benefit plans
  • Asbestos, PCBs (special substances - may cover via separate Pollution Policy)
  • Interim Breaches between signing and closing
  • Net Operating Losses

 

Why Buyers Request Coverage:

  • Enhance Amount / Duration of Indemnity
  • Distinguish Bid in Auction
  • Ameliorate Collection Concerns
  • Protect Key Relationships
  • Protect the Deal
  • Ensure Certainty of Purchase Price
  • Address Stakeholder Concerns

 

Why Sellers Request Coverage

  • Distribute Sale Proceeds (Time Value of Money)
  • Protect the Purchase Price through the due diligence process
  • Supplement Disclosure Process
  • Protect Passive Sellers
  • Expedite Sale
  • Reduce Contingent Liabilities
  • Address Stakeholder Concerns

 

For more information, consult the complete brochure here.