RWI Insurance: Protecting Your Investments and Assets

Investments and assets are important for individuals and businesses alike. These assets can be exposed to various risks that could lead to financial loss or even failure. One way to protect investments and assets is through RWI insurance. RWI insurance provides coverage for losses resulting from breaches of representations and warranties in a merger or acquisition transaction. In this article, we’ll explore what RWI insurance is, how it works, and its benefits.

What is RWI Insurance?

Representation and Warranty Insurance (RWI) is an insurance policy that provides coverage for financial losses resulting from breaches of representations and warranties made in a merger or acquisition transaction. RWI is a type of transactional insurance that protects buyers and sellers from financial risks associated with representations and warranties.

Representations and warranties are statements made by the seller about the target company’s operations, financial position, and legal compliance. These statements are often included in the purchase agreement and are intended to give the buyer an understanding of the target company’s condition. Breaches of representations and warranties can result in financial losses for the buyer, such as legal fees, indemnifications, and reduced purchase price.

RWI insurance policies can be purchased by either the buyer or the seller. The policy limits are typically based on a percentage of the purchase price and can range from 1-15%. The policy duration is typically 3-7 years, but can be shorter or longer depending on the negotiation.

How Does RWI Insurance Work?

When a buyer purchases a company, the seller makes representations and warranties about the business. If the buyer later discovers that any of these statements are untrue, the buyer may have a claim against the seller. This claim can result in a negotiation to recover losses from the seller.

RWI insurance can provide an alternative to this negotiation. If the buyer discovers a breach of representation or warranty, they can make a claim against the insurance policy rather than the seller. The insurer will then investigate the claim and pay out any covered losses.

Before purchasing an RWI insurance policy, the buyer and seller will need to negotiate the terms of the policy. This includes the policy limit, duration, and exclusions. The policy will also include a deductible, which is the amount that the buyer must pay before the insurance coverage kicks in.

Benefits of RWI Insurance

RWI insurance provides several benefits for buyers and sellers in a merger or acquisition transaction:

1. Risk Transfer

RWI insurance transfers the financial risk of representations and warranties breach from the buyer or seller to the insurer. This can reduce the potential financial exposure of the buyer or seller in the transaction.

2. Reduced Transaction Time

Negotiations related to the representations and warranties can be complex and time-consuming. By purchasing an RWI insurance policy, the parties can more quickly negotiate and close the transaction.

3. Enhanced Deal Certainty

RWI insurance can provide greater certainty and peace of mind to both buyer and seller. RWI insurance can give greater confidence to the buyer that they will be able to recover their losses if representations and warranties are breached, and greater confidence to the seller that they will not be liable for future claims.

FAQs

1. Who typically purchases RWI insurance?

RWI insurance can be purchased by either the buyer or seller in a merger or acquisition transaction. The party that purchases the policy will depend on the specific transaction and negotiation.

2. What is the policy limit for RWI insurance?

The policy limit for RWI insurance is typically based on a percentage of the purchase price and can range from 1-15%. The specific limit will depend on the specific transaction and negotiation.

3. How long does RWI insurance coverage last?

The duration of RWI insurance coverage is typically 3-7 years, but can be shorter or longer depending on the negotiation.

4. Does RWI insurance cover all breaches of representations and warranties?

No, RWI insurance policies will have exclusions and limitations. For example, certain matters may be excluded from coverage, such as environmental liabilities or known issues. The policy will also have a deductible, which is the amount that the buyer must pay before the insurance coverage kicks in.

5. Is RWI insurance expensive?

The cost of RWI insurance will depend on the specific transaction and negotiation. The premium will be based on the policy limit, duration, and exclusions. The premium can range from 1-5% of the policy limit in most cases.

Conclusion

RWI insurance is an important tool for protecting investments and assets in merger and acquisition transactions. RWI insurance provides coverage for losses resulting from breaches of representations and warranties, transferring the financial risk to the insurer. RWI insurance can save time and reduce the complexity of negotiations, while providing greater certainty and peace of mind for both buyer and seller.