Safeguard Your Deals with RWI.

Individuals and corporations involved in mergers and acquisitions (M&A) are increasingly using representations and warranties Insurance (RWI) to protect their corporate transaction. RWI is a specialized form of insurance that compensates a buyer or seller for financial losses due to a breach of contractual representations or warranties made as part of a M&A purchase agreement. Once a merger or acquisition deal has been completed, RWI covers unforeseen costs caused by breaches of the seller’s representations. Under the terms of the RWI policy, the insurance company will indemnify the buyer for losses resulting from an unknown breach of a representation or warranty in the transaction agreement.

According to the American Bar Association, approximately one-third of M&A deal disputes in North America arise out of an alleged breach of a seller’s representations and warranties. It has become standard practice for sellers to instruct buyers to obtain R&W insurance as part of the purchase agreement negotiation.

SterlingRisk has a team of lawyers that have worked alongside buyer’s corporate lawyers to assist with RWI on dozens of corporate transactions.

In a M&A deal, RWI can help streamline deal negotiations. While most policies are written on the buy-side of the deal, both buyers and sellers benefit from RWI. The benefits include the following:

Buyers
Sellers

RWI Benefits for the Buyer

RWI protects buyers from financial losses in the event of a breach of representation made by the seller in a purchase agreement or indemnity.

RWI insurance replaces the need for a large escrow account with a relatively low-cost insurance premium.

RWI insurance extends the duration for representations and warranties. This helps buyers identify and report problems with the acquired business and seek reimbursement from the insurance company instead of the seller.

RWI insurance helps buyers recover losses directly from a financially secure insurer instead of a seller in the transaction who may or may not have the assets to satisfy a potential claim. This improves buyer confidence, as RWI allows for low-risk mergers and acquisitions transaction.

RWI Benefits for the Seller

RWI insurance offers liability protection, particularly for defense or settlement costs.

RWI insurance protects sellers who have not been actively involved in the management of the business from an unintentional nondisclosures or breach of representations.

The RWI Insurer takes the risk of liability, not the seller. In the event of a dispute, sellers are not responsible for the cost or complexity of defending a claim. This responsibility instead falls on the insurer.

RWI insurance allows sellers to distribute sale proceeds immediately rather than tying up funds in an escrow account. This allows the seller to exit the transaction without traditional escrows of purchase price and hanging indemnity obligations. As a result, this maximizes the return to owner/investors.

Reps & Warranties for a Merger & Acquisition

Coverage

In general, these policies are negotiated per transaction. It is common for RWI policies to provide blanket coverage for breaches of the seller’s representations and warranties found in a purchase and sale agreement.

Retention / Deductible

Representations and warranties insurance policies will often contain a self-insured retention or deductible. These will vary based on the transactions and the insurer’s risk assessment. Typically, the retention or deductible fall between .75% and 1% of the total value of the transaction.

Policy Limits

The limits of the RWI policy are set and negotiated based on indemnification provisions in the purchase and sale agreement and limits required in the transaction.

Premium

The premium for RWI policies depends on the nature of the insured risks, the amount of the retention, the term of the coverage and the policy limit. In general, pricing can range from 3% to 5% of the policy limit.

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Representations & Warranties Insurance

Representations & Warranties Insurance Discussion Presentation

Underwriting Process for Representations & Warranties

Submission

SterlingRisk will send a submission to over a dozen carriers who are active in the RWI market to provide non-binding indications. The following is some of the information that the carrier will request:

Name and address of insured
Target Sign and Close date
Confidential Information Memorandum (CIM)
Purchase Price
Draft Purchase Agreement or LOI
Limit of Liability and Term
Financials (Preferably 2 years of audited or reviewed)

Underwriting Process

Provide access to Data Room.
Provide 3rd party diligence reports and non-reliance letters (NRL) for execution.
Underwriters will require written diligence for at least the following areas: Finance/Accounting, Environmental, Regulatory, Tax, International, Corporate/Legal, IP/IT, Employment, Insurance

Quote Review & Comparison

SterlingRisk will review quotes from the carriers and provide a summary to client.
SterlingRisk will recommend a carrier based on coverage and premium.
Once a carrier is decided by client, the client signs and returns NBIL/Fee agreement with Underwriting Fee.

Underwriting Diligence Call

The underwriting diligence call is scheduled a few days prior to closing when near final drafts of the purchase agreement and the disclosure schedules are available.
The underwriter will provide an agenda with a list of questions in each area of diligence as well as general background on deal and the process for diligence. Client should plan to have advisors that conducted the diligence available on the call.
Following the call, the underwriter will provide follow up questions and draft policy/binder.

Binding the RWI Policy

Client submits an order to bind as well as the No Claims Declaration (NCD), signature pages for binder.
Carrier issues binder and/or policy. Coverage is bound.
SterlingRisk will provide an invoice that must be paid within 30 days after binding and any other documents that may need to be signed.

RWI Claims Examples

Most claims for an RWI policy involve that reps within the purchase agreement have been breached. The following are examples of claims:

Breach of the financial statements.

Representations regarding undisclosed liabilities, compliance with laws, and taxes.

Not conducting business in the ordinary course. The seller must conduct its business consistently with industry customs and practices.

Not maintaining adequate internal controls. If the company doesn't have sufficient safety measures to protect its employees and the insured subsequently must upgrade its equipment for safety purposes, a claim could be filed.

Problems with material contracts. This could apply if a vendor is unable to provide its goods or services to the insured, and it affects the business's ability to deliver its final product to customers.

Problems with customer relationships. The seller had entered a contract with a client that falls through later even though the seller had represented that all contracts continued to be valid, and that recession affects the new owner's business and income, the insured can file a claim.

Industry Specialist

Howard Tollin, Esq.

President of Environmental & Professional Services

Howard is an insurance lawyer with over 30 years of experience who regularly works with corporate and real estate lawyers to represent their clients with transferring liabilities to insurance companies. He utilizes innovate products as solutions for lawyers to remove obstacles on hundreds of transactions.

P | 516-773-8718

E | HTollin@sterlingrisk.com

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