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  • October 2, 2022

Benefits of Representations and Warranties Insurance in Corporate Mergers and Acquisitions

Benefits of Representations and Warranties Insurance in Corporate Mergers and Acquisitions

Benefits of Representations and Warranties Insurance in Corporate Mergers and Acquisitions 1024 536 Dominion Risk

Representations and warranties insurance (RWI) is designed to cover certain breaches of representations and warranties made in business merger and acquisition (M&A) agreements. RWI has emerged as a preferred tool by executive management to reduce transactional risks. 

Policies can be purchased by either the buyer or the seller in an M&A transaction. Buyer-side RWI policies provide first-party liability coverage to protect buyers from financial loss due to misrepresentations by sellers—whether intentional or accidental—such as misrepresented financials, unknown third-party claims over intellectual property, and failure to obtain environmental or legal permits. On the other hand, seller-side policies offer liability protections against accidental misrepresentations in purchase agreements.

Benefits of RWI for buyers include:

  • Appearing as a more attractive bid — In an auction situation, RWI reduces or eliminates the need for the seller to establish an escrow to cover any post-sale contingencies and liabilities. As a result, the buyer’s bid will look more appealing.
  • Adding additional time and protection — RWI policies allow for extended time frames for a buyer to uncover specific problems with the general representations of the acquired business. The buyer can also purchase insurance at higher amounts beyond the negotiated indemnity cap.
  • Enhancing protection — Having RWI coverage in place generally makes collecting indemnification easier and more certain.

It can also be advantageous for sellers to purchase RWI. Benefits of a seller-side policy include:

  • Reducing or eliminating the need for an exclusivity of remedies (EOR) provision — In a traditional M&A transaction, an EOR provision is a guideline for each party’s rights regarding handling claims. However, RWI can reduce or eliminate the need for these provisions, resulting in a less complicated transaction.
  • Reducing or eliminating the need for an escrow — An escrow can decrease the seller’s shareholder proceeds at the closing. RWI allows for the immediate distribution of more of the proceeds.
  • Allowing for a cleaner exit — M&As can get messy quickly since it’s unlikely for both parties to agree on every detail of the transaction. RWI coverage can provide a seller with fewer contingent liabilities, resulting in a cleaner exit.

RWI insurance is a tool increasingly utilized in M&A transactions. As a result, it is beneficial for corporate executives to familiarize themselves with the product and its benefits. For more risk management guidance, contact us today.