Representations and Warranties Insurance

Representations and warranties insurance (RWI) is an insurance product that covers breaches of representations and warranties in mergers and acquisitions (M&A) transactions. It helps to protect the buyer from financial loss due to breaches in these representations and warranties made by the seller during the negotiations.

What Are Representations and Warranties?

Representations and warranties are statements made by a seller about the company being sold. These statements are meant to provide the buyer with a clear understanding of the financial and operational state of the business. Representations and warranties can include information about assets, liabilities, taxes, contracts, and any other material information that can affect the value of the company.

If the seller makes any misrepresentations or breaches a warranty, the buyer can suffer financial loss. For example, if the seller falsely represents the level of debt in the company, the buyer may face unexpected financial liabilities after the acquisition is complete.

How Does RWI Work?

RWI is a form of insurance that indemnifies the buyer against losses due to breaches of representations and warranties. The insurance policy is purchased by the buyer and can cover the full purchase price of the acquisition or a portion of it.

RWI policies are typically negotiated between the buyer and the seller during the M&A negotiations. The policy can be structured to cover specific representations and warranties or can be a blanket policy that covers all representations and warranties.

If a breach of representation or warranty occurs, the buyer can file a claim with the insurer. If the claim is accepted, the insurer will pay the buyer the amount of the loss, up to the policy limit.

What Are the Benefits of RWI?

RWI offers several benefits to buyers and sellers in M&A transactions:

How Much Does RWI Cost?

The cost of an RWI policy depends on several factors, including the size of the transaction, the level of risk involved, and the coverage requested. In general, the cost of an RWI policy can range from 1% to 3% of the transaction value.

The cost of RWI can be negotiated between the buyer and the seller during the M&A negotiations. Sometimes the seller will agree to pay for the cost of the policy as a way to sweeten the deal for the buyer. Other times, the cost will be split between the buyer and seller, or the buyer will pay for the cost of the policy.

Conclusion

Representations and warranties insurance can be a valuable tool for buyers and sellers in M&A transactions. It provides protection for the buyer against financial loss due to breaches of representations and warranties, as well as increased deal certainty, negotiating leverage, and seller flexibility. The cost of RWI can vary, but it is usually a small percentage of the transaction value.

FAQ

What is an RWI policy?

An RWI policy is an insurance product that indemnifies the buyer against losses due to breaches of representations and warranties in M&A transactions.

Who purchases an RWI policy?

The buyer of a company typically purchases an RWI policy, but the cost can be negotiated between the buyer and seller.

What do representations and warranties cover?

Representations and warranties cover information about the company being sold, including assets, liabilities, taxes, contracts, and any other material information that can affect the value of the company.

What happens if there is a breach of representation or warranty?

If there is a breach of representation or warranty, the buyer can file a claim with the insurer. If the claim is accepted, the insurer will pay the buyer the amount of the loss, up to the policy limit.

How much does RWI cost?

The cost of RWI can range from 1% to 3% of the transaction value, depending on several factors including the size of the transaction, the level of risk involved, and the coverage requested.