Bridging the gap

Buyer-side Representations & Warranties (R&W) Insurance protects a buyer from unknown loss arising from a breach of warranty or a misrepresentation. The policy allows a seller to reduce or eliminate its indemnity cap for a post-closing breach, providing a clean break.

Differentiate a bid in a competitive process by eliminating the requirement for sellers to stand behind onerous indemnification provisions or to set monies aside in escrow.

Overview

R&W Insurance protects a buyer against unknown loss arising from a misrepresentation or a breach of warranty.

The policy doesn't cover known risks and it is important to understand the implication of diligence findings on cover.

We undertake a detailed analysis of the financial, legal and tax diligence reports - flagging identified risks which may be excluded from the policy to deal teams. This allows these risks to be factored into the underlying deal negotiation.

Covered

  • Seller/Company’s Representations & Warranties
  • Pre-Closing Tax Indemnity

Excluded

  • Purchase Price Adjustments (Net working capital adjustment)
  • Known Risks
  • Market & Deal Specific Exclusions

Benefits

R&W insurance benefits all parties to a transaction, some of the benefits include:

  • Increasing the survival period of the representations and warranties (up to three years for general representations and six years for fundamental representations)

  • Increasing the indemnity cap through insurance whilst simultaneously reducing the indemnity cap for a seller

  • Easing the negotiations of the parties when it comes to the representations and warranties

  • Negating the concerns about the creditworthiness of a seller using an A-rated insurer as a counterparty

Parameters

Scope

Provides financial cover to the insured in the event of a breach of warranty or a misrepresentation. The policy covers unknown risks and exclusions including identified risks, the availability of net operating losses, fines and penalties uninsurable by law and underfunding of employee benefit plans.

Policyholder

The R&W policy can be held by either the seller or the buyer. However, it is much more common for R&W insurance to be placed on the buy-side. The advantage of insuring the buyer (rather than the seller) is that it allows a direct claim to be made against the insurer, avoiding the need to pursue the seller. Buy-side policies thus help facilitate deals by giving buyers an A-rated counterparty to recover from, while ensuring a clean exit for the seller.

Policy period

The policy periods match or, in the case of a buyer-side policy, extend the time limitations set out in the purchase agreement. The policy period is generally three years for claims under the general representations whereas it is six years for claims under the fundamental representations (including tax).

Retention or excess

This ranges depending on the jurisdiction, the parties and the nature of the underlying company. This is a function of the enterprise value and is typically between 0.5 -1.5% of the enterprise value.

Policy limit

Typically 10-30% of the enterprise value although a deal can be insured up to 100% if necessary. The lower the percentage of the enterprise value, the higher the premium rate.

Premium

This is calculated as a function of the policy limit. The premium will depend on factors including governing law of the acquisition agreement, nature and location of the target's operations and policy parameters. Premium rates are typically 2.5 – 3.5% for operational businesses and 2 – 3% for real estate transactions.

Underwriting fees and taxes

Underwriting fees and taxes are payable in addition to the premium. The fees depend on the size and complexity of the transaction whereas the taxes are typically determined by the jurisdiction where the insured entity is registered or where the risk is primarily located.