Representations and Warranties Insurance – The Buyer’s Advantage

The number of Representations and Warranties insurance policies sold has increased sevenfold in the past five years. More and more companies involved in M&A deals are being educated on the benefits of R&W coverage for both the buyer and seller. Part 2 is focusing on the Buyer’s Advantage.

Most Policies Purchased are “Buyer’s Side”

The vast majority (around 95%) of R&W insurance policies sold are Buyer’s Side policies. The policy is designed to provide coverage for the buyer against financial loss due to a seller’s breach of contractual warranties. There are numerous advantages to the buyer including:

• Improves their bid when competing with other buyers by lowering the seller’s indemnification provisions by supplementing it with R&W coverage.
• Helps remove worry that the seller won’t be able to meet the transaction’s indemnification provisions.
• Can extend the duration of the R’s & W’s detailed in the contract, allowing the buyer more time to discover problems with the purchased business.
• Helps calm the buyer’s financiers’ concerns about the risk of the purchase.
• Transfers much of the risk associated with the purchase of a business to the insurance markets.

Another advantage of the Buyer’s Side policy is that it’s a “first-party” policy. That means the buyer can make a claim against the policy directly without having to get the seller involved.

What Types of R&W Insurance Claims Are Common?

Most of the claims triggering Buyer Side policies involve taxation issues which only arose after the purchase. Disputes involving financial statements make up the next percentage of claims. Various compliance issues, contracts and IP and employee issues are also common policy triggers. Because the seller’s indemnity is typically capped at a much lower limit compared to the overall transaction value, the Buyer’s Side R&W insurance policy fills the indemnification gap when it responds to the types of breaches outlined above.

What Doesn’t R&W Insurance Cover?

It’s important for the buyer’s legal team to closely review the proposed R&W coverage to ensure it’s crafted to do what they want it to do. Typical policy exclusions include environmental claims, actual knowledge of a breach of contractual R’s & W’s, fraud, punitive or exemplary damages, underfunded benefit plans and different types of regulatory exposures. An insurance broker who is well-versed with R&W coverage will negotiate on your behalf to obtain the protection you desire from your Buyer’s Side policy.

See Part 1 “Representations and Warranties Insurance”
See Part 3 “The Seller’s Benefit to Representations and Warranties Insurance”