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M&A Insurance: Representations and Warranties

Representations and warranties (R&W) insurance, also known as warranty and indemnity insurance outside of North America, typically covers breaches of representations and warranties, and claims under indemnification provisions associated with a merger or acquisition.

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R&W insurance is often used as an alternative to traditional indemnification in M&A transactions. It facilitates simpler exits for sellers by eliminating escrows or contractual indemnities, and replacing them with an insurance policy. It also provides benefits to buyers, including longer periods of indemnification.

What is R&W insurance?

R&W insurance is a specialist insurance product covering breaches of representations and warranties, and claims under indemnification provisions (including the tax indemnity/covenant), contained in sale and purchase agreements.

The insurance covers loss or liability arising from unknown or undisclosed matters and indemnities. The insurer effectively “steps into the shoes” of the party giving the contractual promises.

Each R&W insurance policy is tailored to meet the specific needs of a transaction. An R&W policy is a non-renewable, single-premium product with the premium being paid upon completion of the transaction.

In M&A, R&W insurance is intended to work in parallel with the negotiations and is designed to support (rather than replace) a robust due diligence process.

Who should buy R&W insurance?

In M&A, R&W insurance can be purchased by either a buyer or a seller. More than 95% of the R&W insurance policies placed by Willis Towers Watson are buyer-side policies.

The need for R&W insurance often arises when the amount or quality of recourse that the seller is willing, or able, to offer is insufficient to the buyer.

Different expectations regarding contractual liability can be a serious barrier to an effective M&A transaction. R&W Insurance can provide a solution that satisfies both parties’ expectations.

Buyer-side policy

A buyer-side R&W insurance policy offers two key advantages over a seller-side policy:

  1. The buyer can claim directly against the insurer (i.e., without having to pursue recourse against the seller(s) or warrantor(s), enabling a clean exit for the seller(s)).
  2. A buyer-side policy will also provide indemnification with respect of any fraudulent breaches by seller(s).

‘Stapling’ R&W insurance (seller-side to buyer-side ‘flip’)

Buyer-side policies are often initiated by a seller who either suggests or insists that the buyer enters into the policy as the insured, facilitating a simpler exit. This process is often referred to as “stapling” R&W insurance to the transaction.

Seller-side policy

This protects the seller(s) (plus any guarantor or other warrantors, if applicable), from claims by the buyer for breach of representation or warranty, or under the tax indemnity/covenant, enabling a seller to ring-fence the risks associated with the sale. It also avoids the need to claw-back proceeds to satisfy indemnification claims.

End of fund life insurance

In private equity (PE), there is a form of R&W insurance called an end of fund life policy, which insures residual liabilities arising from a PE fund’s investment activities, enabling the fund to close and distribute final proceeds to investors.

PE managers use an end of fund life policy to:

  • Maximize returns
  • Facilitate simpler exits
  • Reduce fund administration costs
  • Allow for a more efficient final distribution
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