In today's dynamic business landscape, safeguarding your investments is crucial. Representations and warranties insurance (RWI) has emerged as a fundamental tool in mitigating risks arising from mergers, acquisitions, minority investments and other deal structures. At WTW, we embrace the complexities of these transactions and offer bespoke solutions tailored to client needs. Our expertise not only helps you navigate potential pitfalls but also empowers you to make confident, informed decisions. Discover how WTW can support your business strategy with RWI.
What is representations and warranties insurance and why should you use it?
Fundamentally, representations and warranties insurance is a risk-shifting and mitigation measure and tool to make transactions happen on the best possible terms and timelines. This insurance solution is designed to protect buyers in M&A transactions against losses from breaches of representations and warranties made by sellers to buyers during the sale, including in cases of seller fraud. The primary goal is to facilitate smoother negotiations and provide both parties with financial security, enhancing the overall value of the deal. By transferring risks associated with these representations, buyers proceed with confidence knowing the representations are backstopped by a reputable insurer, and sellers reduce or even eliminate any indemnity requirement.
To best effectuate this coverage, the RWI policy is meant to stand back-to-back with the representations and warranties in the purchase agreement to the extent possible. While policies typically cover a buyer entity as the Named Insured, sell-side policies are also available to protect sellers against buyer claims of breach (although seller policies do not indemnify for seller fraud).
RWI policies are typically structured to provide three years of coverage for General Representations and six years for Fundamental Representations, including for the Tax Representations and the Pre-Closing Tax Indemnity. However, WTW has been able to negotiate many other structures, including seven years of coverage for Fundamental Representations and six years of coverage for all representations. In any case, the policy period is much longer than the typical indemnity period of twelve to eighteen months, giving buyers a longer period of coverage and security as they integrate a new company.
Like most insurance policies, RWI policies include a policy deductible (referred to as a “retention”), which is a single aggregate deductible eroded by all claims for loss. The deductibles are typically in the range of 0.5-0.8% of the total enterprise value of the transaction, dropping lower (typically to 0.3-0.5% of enterprise value) at twelve months after closing. WTW frequently negotiates zero-dollar retentions for select “true” Fundamental Representations (such as those regarding the organization of the target, authorization to enter the transaction, etc.).
The placement of an RWI policy on a transaction can also have a positive influence on the negotiation of the deal. The policy’s availability as a backstop can give sellers comfort in making more comprehensive representations and warranties than they might otherwise, making the overall deal terms better and more competitive. The policy can also help bridge gaps between buyer and seller around diligence, indemnity expectations, and certainty to close. In competitive bidding situations, offering an RWI policy can give buyers a distinct advantage, by demonstrating financial strength, commitment to the deal, and a willingness to allow sellers to avoid onerous escrow burdens.
At WTW, we tailor RWI and related solutions to your specific transaction needs, ensuring the necessary protection for a successful M&A deal.
When should representations and warranties insurance be considered for a deal?
In the last few years, representations and warranties insurance has become increasingly flexible and deployable across transactions of all sizes and structures, including both stock and asset purchases. It is useful in many types of transactions including:
RWI provides minority investors with valuable downside protection. While policies on minority investments are often prorated to the buyer’s investment amount, the WTW team has successfully obtained full, non-prorated loss coverage for minority buyers in certain scenarios. Please contact us for more information.
Likewise, RWI is helpful for numerous types of buyers including:
Public companies
Publicly-traded companies acquiring privately-held companies or even other public companies can employ RWI policies to smooth acquisition processes and backstop indemnity obligations.
Private equity firms
Private equity firms are among the most frequent users of RWI policies, as their often-standardized diligence exercises and acquisition models fit well into carriers’ appetites and expectations. Private equity firms should work with brokers keenly focused on deploying their capital with high-quality insurer counterparties, so that, in claims scenarios, the insured is well-positioned to benefit from long-term relationships with carriers that will work diligently in partnership with the broker to favorably resolve the claim.
Strategics
While many corporate acquirors historically relied on traditional escrow structures to get deals done, the rise in seller demand for RWI policies has increasingly introduced strategic buyers to transactional insurance products. RWI policies are well-suited to strategics, as they protect deal value longer than most escrow arrangements and are adaptable to the contours of a strategic’s (often in-house) diligence exercise.
RWI carriers’ underwriting appetite has also expanded as the product has matured, making this an insurance solution for almost every type of target business. Carriers can cover healthcare businesses, financial services companies, tech companies, media businesses, manufacturers, casinos, music, pharmacological royalty streams and more.
With our extensive expertise and tailored solutions, WTW is well-positioned to assist in identifying the right RWI policy for your specific needs, ensuring you navigate your M&A transaction with confidence.
Why choose WTW for your representations and warranties insurance needs?
At WTW, our expertise in transactional solutions is unparalleled. With a dedicated team of professionals who have extensive experience in M&A, we understand the complexities and challenges that come with each transaction. Our colleagues leverage deep market insights to tailor solutions that meet the distinct needs of our clients, ensuring optimal protection and peace of mind.
The positive feedback we consistently receive — often from clients we have served for over a decade — reflects our enduring commitment to excellence. We offer comprehensive support services throughout the M&A process. From initial consultations to post-transaction support and claims advocacy, our team is by your side every step of the way. We pride ourselves on our collaborative, guiding approach, working closely with clients to ensure they have a thorough understanding of their coverage options and the implications for their transactions. This holistic support not only enhances the client experience but also drives better outcomes for Willis clients.
Disclaimer
WTW hopes you found the general information provided here informative and helpful. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal advisors. In the event you would like more information regarding your insurance coverage, please do not hesitate to reach out to us. In North America, WTW offers insurance products through licensed entities, including Willis Towers Watson Northeast, Inc. (in the United States) and Willis Canada Inc. (in Canada).
