The Overview
Representations and Warranty insurance (R&W Insurance) has become a crucial component in provisional indemnification and risk mitigation relevant to acquisitions and mergers. Transactional coverage provides assurance and protection, allowing buyers and sellers to move forward with confidence, all without sacrificing limited cash proceeds.
Representation and Warranties Insurance
Representation and warranties insurance is a contract between a participant in a private equity transaction, and an insurance company, wherein the insurance company indemnifies the buyer for potential losses resulting from misrepresentations made by the seller. The coverage is a means for protecting the buyer from misrepresentations, shifting the risk of financial loss from the seller to the insurance provider. The insurance eliminates the need for a seller’s escrow and frees up critical cash proceeds. In addition, the coverage provides the security for both buyer and seller to confidently move forward with a mutually favorable merger and acquisition.
Who is covered?
The buyer is the most typical party to pursue protection against breaches of representations and warranties; however, there are instances where the seller may procure the coverage for additional certainty. The intent is to free the proceeds usually used to fund the seller’s escrow.
The coverage
Those who secure R&W insurance usually secure a policy limit commensurate to the indemnity cap. Approximate coverage is generally between 10-15% of the overall purchase price.
Coverage cost
Premium costs typically average between 3 to 5% of the policy limits.
Retention
A retention can be compared to a deductible. Generally, retention is 1-3% of the corporate value; however, underwriters may adjust retention rates to better match purchase agreement terms. Customarily as part of the transaction agreement, the rate is equally divided between the buyer and seller.