United States: Representations And Warranties Insurance: An Innovative Solution

Last Updated: January 2 2014
Article by D. Stephen Antion and Philip Lang

One of the most contentious and negotiated aspects of an acquisition transaction is the allocation of risk for post-closing breaches of the seller's representations and warranties, and the remedies available to the buyer for such breaches. The buyer will want to be protected and indemnified for any liabilities arising from a breach, while the seller will prefer a clean break at closing with minimal holdback of the purchase consideration and without responsibility for unknown contingent liabilities. The actual representations and warranties of the seller will also be heavily negotiated to ensure they work with the indemnification provisions to properly reflect the agreed upon allocation of post-closing risk.

To help bridge the distance between the buyer and seller and mitigate risk exposure, more and more buyers and sellers are turning to representations and warranties insurance, as well as other types of transaction liability insurance. Though representations and warranties insurance was first introduced in 1998, in the past few years, the market has seen a surge in the number of transactions using transactional insurance products. Although representations and warranties insurance is still in relatively limited use in the U.S., it has seen widespread use in Europe, Asia and Australia, with about 90 percent of Australian private equity deals utilizing such insurance. Other transactional insurance products can be utilized with representations and warranties insurance to address specific risks for a particular transaction.

How is representations and warranties insurance used?

Representations and warranties insurance, whether buyer-side or seller-side, can be used as a backstop or supplement for the seller's indemnification obligations under the purchase agreement. It may also be used as a substitute remedy for indemnification that serves as the buyer's sole recourse in the event of breaches of the seller's representations and warranties. For the payment of a one-time premium, the insurer takes on the risk for breaches of the seller's representations and warranties and pays the buyer or the seller, as appropriate.

Buyer-side representations and warranties insurance is more common and provides for the direct payment by the insurer to the buyer to cover losses due to breaches of the seller's representations and warranties. This insurance can be used as a supplement to a negotiated indemnification provision, in which case the insurance can provide additional coverage and protection beyond the negotiated indemnification caps and survival periods. In the alternative, the parties may agree to delete the concept of indemnification in the purchase agreement and list recourse to the representations and warranties insurance as the sole remedy for a breach of the seller's representations and warranties. As one can imagine, this is very attractive to sellers and may be used competitively by buyers seeking an edge in an auction process. Seller-side representations and warranties insurance is typically used as a backstop to the seller's indemnification obligations under the purchase agreement in situations where the buyer demands indemnification and an escrow from the seller. With such a policy, the insurer will indemnify and pay sellers for any losses they are contractually required to indemnify the buyer for under the purchase agreement. One significant difference between seller-side and buyer-side representations and warranties insurance is that a seller-side policy will not provide coverage for breaches due to the seller's fraud, whereas such breaches are covered in a buyer-side policy. In addition to providing less comprehensive coverage, this policy leaves sellers in the middle and requires them to respond to and deal with post-closing claims from the buyer. Also, the terms of this policy may not completely mirror the terms of the representations and indemnities in the purchase agreement, so there could be a gap in coverage.

As a result, the policy can be beneficial but is likely to be used only where the buyer refuses to accept a buyer-side policy as its sole recourse.

Structuring an acquisition with a representations and warranties insurance policy can greatly expedite the process by removing the lengthy negotiations of the indemnification and liability provisions. A policy can also be issued very quickly, usually in two to three weeks. As representations and warranties insurance has grown in usage, insurers have become more sensitive to the timing concerns in acquisition transactions and are, in turn, streamlining the insurance underwriting and issuance process.

Coverage and pricing

Representations and warranties insurance policies typically provide coverage up to a cap of 10 percent to 20 percent of the enterprise value of the target company, with higher coverages structured through multiple insurers. The premiums for representations and warranties insurance policies have decreased through the years and are now generally priced in an amount equal to 2.5 percent to 3.5 percent of the coverage amount. Similar to a "basket" in an indemnification provision, a representations and warranties insurance policy will also include a modest retention amount or deductible, with the insurer only required to pay when losses exceed the deductible. The coverage period for representations and warranties insurance will generally mirror the survival periods for the representations and warranties in a typical purchase agreement. General representations and warranties have a shorter coverage period of up to two years, while certain fundamental representations and tax representations have a longer coverage period of up to six years. Although the liability of the seller for the representations and warranties in the purchase agreement may not survive the closing, the insurer will continue to cover losses for breaches of the seller's representations and warranties during the coverage period. As the use of representations and warranties insurance has continued to grow and develop, some insurers are now offering, for an increased premium, a coverage period of up to six years for all representations and warranties. Every representations and warranties insurance policy has certain exclusions from coverage.

Typical exclusions include the following: Losses arising from facts and circumstances of which the buyer had previous knowledge. Items included in the buyer's due diligence reports or listed on the disclosure schedules to the purchase agreement. Losses due to the breach of any of the seller's covenants and any post-closing purchase price adjustment. It is important to note these exclusions may be disadvantageous to the buyer as compared to a traditional negotiated indemnification provision.

Considerations for the buyer

In determining whether a representations and warranties insurance policy is the right approach, the buyer will need to consider the benefits and disadvantages of the policy in the context of the particular facts and circumstances of the contemplated transaction.

Are there concerns over the ability to collect from the seller? A representations and warranties insurance policy can provide the buyer comfort and security in situations where the seller could present a credit risk or where there are concerns over the ability to collect for losses directly from the seller.

Is the target company a public company? A representations and warranties insurance policy can be used in the acquisition of a public company for protection not otherwise available in typical public acquisitions, where individual shareholders do not stand behind the company's representations and warranties post-closing.

Are continuing members of management selling shareholders? Representations and warranties insurance can ease some of the tension that may arise in a situation where the buyer seeks indemnification claims from former shareholder management members of the target company who are employed by the buyer after the closing.

Does the buyer insist that the seller provide an indemnity? If the buyer insists that the seller or sellers stand by the representations and warranties and provide indemnification for the buyer, representations and warranties insurance may still provide benefits to the buyer. If the seller will only provide indemnification up to lower-than-desired limits, a representations and warranties policy can bridge any gaps in coverage.

Does the buyer want a longer period of coverage? With the broad six-year representations and warranties insurance policy now being offered by certain insurers, a buyer could have a longer coverage period than what could be negotiated in an indemnification provision, which is usually one to two years.

Are there any potential significant liabilities known to the buyer? As discussed above, a representations and warranties insurance policy excludes from coverage losses arising out of facts or circumstances that were known to the insured prior to the closing. In addition, losses arising out of matters that are described in any due diligence reports or disclosed in the disclosure schedules to the purchase agreement are also excluded. For example, in a situation where it is known and disclosed to all parties that there is pending litigation that may result in significant damages, a representations and warranties insurance may not provide any protection. The buyer would need specific line item indemnification of the litigation to ensure it is protected regardless of prior knowledge and disclosure of such matter.

A separate transactional insurance policy could be used together with a representations and warranties insurance policy to provide coverage that would otherwise be excluded, but such transactional insurance policies come at a higher price.

Are there concerns over sharing any diligence reports with the insurer? As part of the underwriting process, the buyer will need to provide the insurer with copies of all diligence reports, including legal, financial and environmental reports.

Are there concerns about breaches of "fundamental representations" that could result in significant liabilities? In a typical representations and warranties insurance policy, all claims will be subject to the same maximum cap on coverage and basket or deductible, regardless of the specific representation or warranty breached. In many purchase agreements with indemnification provisions, however, certain fundamental representations of the seller- such as organization, authority and capitalization, and representations relating to taxes- are excluded from the maximum cap and basket. The reasoning behind this is that consequences of breaching such representations may result in significant and irreparable damage to the buyer. Thus, the scope of the coverage may be less than what would be negotiated with a seller.

Does the seller have material post-closing covenants? While a traditional indemnification provision will usually cover breaches of post-closing covenants, such covenant breaches are excluded from coverage under representations and warranties insurance. In the event a seller breaches a post-closing covenant, such as a non-compete or nonsolicit provision, the only remedy for the buyer may be to sue such a seller for breach of contract.

Is the buyer involved in a competitive bidding process? Given the benefits a representations and warranties insurance policy presents a seller, a buyer can make its bid more appealing to the seller by proposing a "clean break" deal structure that incorporates a representations and warranties insurance policy.

Considerations for the seller

For a seller, the use of a representations and warranties insurance policy can be a very attractive way to structure a transaction.

The seller can have a clean exit. From the seller's perspective, one of the key advantages of representations and warranties insurance is that it provides the confidence of a clean exit without contingent post-closing liabilities or any holdback or escrow of the purchase price. This is particularly true for private equity fund sellers where the absence of an escrow will enhance the fund's IRR by avoiding the delayed receipt of the escrowed proceeds. It may be critical if the fund is at the end of its term and needs to exit and distribute the proceeds to its limited partners.

Avoid issues that arise relating to joint and several liability with multiple sellers. In an acquisition involving multiple sellers, a key point of contention is whether the sellers are subject to joint and/or several liability. A representations and warranties insurance policy can address the sellers' concerns and protect minority or passive sellers who may have minimal knowledge and/or control of the target company.

Propose a representations and warranties insurance policy from the onset. Given the significant advantages, a seller may want to incorporate representations and warranties insurance into the proposed deal structure in its marketing materials and bid package when marketing the company to potential buyers. A number of private equity funds are now doing this as a matter of policy.

Other transactional insurance products

As the insurance industry has expanded its transactional insurance products, insurers are now able to offer specific products to address a variety of concerns, including tax, contingent liability, litigation buyout, fraudulent conveyance, successor liability and environmental insurance.

These products can be utilized to cover legacy liability concerns known to the buyer and excluded under a representations and warranties insurance policy. These types of transactional insurance policies may be more expensive than the premium for a representations and warranties insurance policy, though. For example, a tax insurance policy may have a premium of 4 percent to 6 percent of the coverage amount, while a litigation buyout insurance policy may have a premium equal to 10 percent of the coverage amount.


Incorporating a representations and warranties insurance policy in an acquisition transaction can be an excellent way to both expedite the process and address the concerns of both parties over the allocation of risk in the event of post-closing breaches. Whether used as a supplement to or a substitute for traditional indemnification provisions, such a policy can be issued quickly and without the protracted negotiations of an indemnity. Plus, it substitutes the uncertainty of future contingent liabilities with a set, one-time premium payment. The buyer has a credit worthy source of recovery for breaches and will deal with an entity that is experienced in processing claims, unlike most sellers. Accordingly, deal participants should carefully consider whether to utilize this insurance product at the outset of their transactions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions