Nuts & Bolts Of Representations And Warranties Insurance

Representations and warranties insurance (RWI) is highly customized insurance for risk in M&A transactions. This article provides a brief primer on the structure, coverage, exclusions, retention and costs of typical RWI policies. Generally the purchaser is concerned about not bearing the risk of undisclosed liabilities and costs relating to the acquired business. The seller typically taddress the concerns of both parties.

An RWI policy provides coverage to the insured for financial loss resulting from a breach of representations and warranties in a purchase agreement. Policies are written on a claims-made basis, with coverage triggered only by a loss or claim occurring within the defined policy period. The policy typically takes effect at closing of a transaction, which could create a coverage gap if the purchase agreement is signed before closing.

RWI can be an effective tool as a supplement or replacement for seller’s indemnification obligations under a purchase agreement. The RWI market has evolved and gained traction in the last few years, mainly due to lower premiums and improved terms of coverage. Sellers have used RWI to maximize closing proceeds and exit cleanly. Purchasers have used RWI to obtain additional protection beyond the indemnity cap and survival limitations and improve their bid in auctions.

The terms of an RWI policy must be negotiated to fit the particular transaction.