Understanding R&W Insurance
What is Representations and Warranty Insurance?
Representations and Warranty (R&W) insurance is a specialized coverage designed to protect parties in mergers and acquisitions (M&A) transactions. It covers unknown and unintended breaches of representations and warranties made in business agreements, offering financial protection for both buyers and sellers.
Benefits for Sellers
Enhancing Deal Attractiveness
R&W insurance enables sellers to make their offerings more appealing in competitive M&A scenarios. By reducing or eliminating the need for traditional escrow holdbacks, sellers can present a cleaner exit strategy, potentially attracting more buyers and higher bids.
Types of R&W Policies
Seller-Side vs. Buyer-Side Coverage
There are two main types of R&W insurance policies: seller-side and buyer-side. Seller-side policies protect sellers from liability for innocent or accidental misrepresentations, while buyer-side policies safeguard buyers against seller misrepresentations, both innocent and fraudulent.
Key Features of R&W Insurance
Coverage Limits and Retention
R&W insurance policies typically have coverage limits that mirror the transaction’s indemnity exposure. The policy deductible, known as retention, often ranges from 1% to 2% of the enterprise value and is usually shared between the buyer and seller.
Advantages in M&A Transactions
Streamlining Negotiations
R&W insurance can significantly streamline M&A negotiations by shifting some of the transaction risks to an insurer. This can help avoid contentious discussions about risk allocation between buyers and sellers, potentially speeding up the deal process.
Cost Considerations
When is R&W Insurance Viable?
While R&W insurance offers numerous benefits, its viability depends on the deal size. It may be cost-prohibitive for transactions valued under $20 million due to premium costs and associated fees. However, some deals between $10 million and $20 million may still be insured due to increasing demand.
A Valuable Tool for M&A Success
R&W insurance has become an increasingly popular tool in M&A transactions, offering benefits for both buyers and sellers. By providing financial protection and facilitating smoother negotiations, it can be a game-changer for sellers looking to maximize their exit value and minimize post-transaction liabilities.
