United States: Zero Seller Recourse Deals And Other Emerging Trends: The Latest Developments In Representation And Warranty Insurance

Last Updated: April 19 2018
Article by John J. McDonald and Christian Chad Warpula

As the representation and warranty (R&W) insurance industry continues to mature and new carriers enter the market, some important trends in R&W insurance policies are emerging. These trends are quickly becoming generally-accepted norms, which will have ramifications for buyers and sellers of companies and R&W insurance carriers. Private equity firms, strategic buyers and sellers of companies, as well as their attorneys, investment bankers and other advisors, need to be aware of these trends.

R&W Insurance

R&W insurance is insurance obtained in connection with merger and acquisition (M&A) transactions. In a typical M&A transaction, the seller has the sole responsibility for indemnifying the buyer for losses resulting from breaches of the seller's representations and warranties in the purchase agreement (typically relating to undisclosed or inaccurately disclosed issues with the company being sold), subject to highly negotiated caps, thresholds and baskets. In an R&W-insured M&A transaction, the buyer obtains recovery for some or all such losses from the R&W insurance policy, up to the policy's coverage limit.

In the late 1990s, R&W insurance emerged as a method to shift some or all indemnification risk from the seller to an insurer. Today, coverage is available across all industry sectors. The increase in R&W insurance usage over the last several years has been exponential. So much so that, as competition has increased, premiums have declined to two percent to four percent of the coverage limit for R&W insurance policies. With the growing pervasiveness of R&W insurance premiums, coverage and other terms have settled, however, this is still a developing trend and more changes in premiums, coverage and other terms may come.

Attractiveness to Strategic Buyers, Sellers and Private Equity Sponsors

R&W insurance is attractive to sellers of companies because it increases the amount of sale proceeds that they receive at closing and reduces or eliminates the possibility that they will be required to return sale proceeds to the buyer, either directly or through release of sale proceeds placed into escrow. That is particularly attractive to private equity sellers of companies, as they typically want to return funds to their limited partner investors as quickly as possible after closing of the sale to maximize their internal rate of return from the investment and their carried interest compensation.

R&W insurance is also attractive to buyers in competitive auction processes because it can improve the competitiveness of their bids by increasing the amount of sale proceeds that the seller receives at closing, as compared to non-R&W insurance transactions in which the customary 10 to 20 percent of transaction proceeds are placed into escrow for 12 to 18 months after closing to act as a source of recovery for the buyer relating to undisclosed issues. Buyers submitting an auction bid letter that includes R&W insurance have a marked advantage over other buyers because, other than a standard seller retention (or basket) if required by the R&W insurance policy, any buyer claims covered by the policy will be asserted against the insurance company instead of the seller.

Security and Structure of R&W Insurance

R&W insurance can provide buyers with protection where there is concern over the ability to collect on the seller's indemnification obligation. This can be extremely useful in bankruptcy sales, take-private transactions, distressed sales and ESOP transactions. R&W insurance policies can be either buy-side (procured by the buyer) or sell-side (procured by the seller) policies. Today, buy-side policies are the dominant form of R&W insurance, comprising at least 80% of policies issued annually in the U.S., according to major insurers and market data. The security that R&W insurance provides is structured to limit the seller's indemnity obligation to escrow of 0.5 percent to 2.5 percent of the purchase price (the "retention") – which, as discussed below, is fading away – supplemented with a buy-side R&W insurance policy to achieve a 7.5 percent to 10.0 percent effective indemnity cap/recourse for the buyer. As the market has matured, the process of obtaining R&W insurance has become increasingly more efficient. However, obtaining R&W insurance can still take weeks from start to finish; therefore, buyers should contact the insurance broker or carrier early in the deal cycle. Like all insurance, the premium for a R&W insurance policy will vary based on many factors, including the size of the transaction, the level of risk involved, the deductible and the cap. However, the investment can be fruitful because R&W insurance extends survival of the reps and warranties/buyer's recourse beyond the typical 12-18-month escrow period to as long as six years after closing.

Zero Seller Recourse Deals

Skin in the Game and Moral Hazard

R&W insurance has not traditionally exculpated sellers from all liability to buyers. As a way of ensuring that sellers have some "skin in the game" and addressing the "moral hazard" risk of a seller failing to provide full and accurate disclosure to the buyer concerning the company being sold because the R&W insurer, rather than the seller, will bear the risk of losses relating to undisclosed issues, R&W insurance policies have traditionally provided for the retention described above, after which buyer losses for undisclosed issues are covered by the R&W insurance policy, up to its coverage limit. Although the retention amount is significantly less than the 10 to 20 percent of transaction proceeds placed into escrow in non-R&W insurance M&A transactions to act as a source of recovery for the buyer, it provides some assurance to R&W insurance carriers that the seller will be vigilant in preparing the disclosure schedules to the purchase agreement and otherwise ensuring complete disclosure to the buyer concerning the company being sold.

However, as new carriers have entered the R&W insurance market, competition among them has increasingly resulted in R&W insurance policies being underwritten in which there is no recourse to the seller. The buyer absorbs losses for the deductible/basket amount and the R&W insurance policy covers any losses in excess of that amount, up to the coverage limit. Some brokers active in the R&W insurance market have estimated that 50 percent or more of R&W insurance policies now being underwritten provide for no-seller-recourse, up significantly from prior years.

Convergence in Premiums

Although there have always been no-seller-recourse R&W insurance policies, the premiums for those policies have historically been meaningfully higher than for R&W insurance policies with seller recourse, due to the additional risk to the R&W insurance carrier, which has tended to reduce their prevalence. However, with the rise in competition among R&W insurance carriers, some of which may be new entrants focused on increasing market share, potentially at the expense of ultimate profitability, the spread between premiums for policies with seller recourse and those without seller recourse has compressed substantially. This has made R&W insurance policies in which there is no recourse to the seller much more attractive to buyers, which typically bear the cost of the policy's premium. A notable trend in no-seller-recourse R&W insurance policies is for the seller to be required to pay a portion (sometimes up to half) of the policy's premium, to help offset any increase in the premium resulting from the elimination of seller recourse.

Other Incentives for Full Disclosure

The compression in the premium spread between recourse and non-recourse R&W insurance policies could be interpreted as indicating that fears of moral hazard are overblown and sellers will be vigilant in providing full disclosure to buyers, regardless of whether they retain post-closing indemnification liability to buyers. Consequently, continuing this argument, there may not be sufficient incremental risk associated with no-seller-recourse R&W insurance policies, as compared to policies in which there is seller-recourse, to justify a large spread in premiums. There is anecdotal evidence to support this argument, as some industry participants underwriting R&W insurance policies have not noticed a substantial difference in the thoroughness of disclosure in no-seller-recourse R&W insurance policies, as compared to seller-recourse policies. Some incentives for sellers to provide full disclosure, regardless of whether they retain liability, include the reputational harm that would come from incomplete disclosure and resulting indemnification claims, as well as the fact that sellers always retain liability for failure to disclose issues that amounts to fraud. In addition, sellers have ample motivation to provide full disclosure in M&A transactions in which the buyer is a private equity firm and the sellers are management team members who will continue to manage the acquired company after the acquisition, because the sellers will essentially become partners with the private equity firm and undisclosed issues coming to light after closing could damage that relationship.

An Unsustainable Trend?

Some more seasoned R&W insurance market participants feel that this is an unsustainable trend that will reverse over time, as carriers incur losses from no-seller-recourse R&W insurance policies and either exit the R&W insurance market entirely or increase the premiums that they charge for such policies to more accurately compensate them for the additional risk. Because of the 12 to 18-month "tail period" between when an R&W insurance policy is underwritten upon closing of an M&A transaction and when indemnification claims are typically made by buyers, usually after completion of audited financial statements and filing of consolidated tax returns including the acquired company surface issues that become the subject of claims, it is probably too early to determine the effect of the recent trend toward the increased use of no-seller-recourse R&W insurance policies. If the widely-watched AIG R&W insurance claims survey expected to be released in the summer of 2018 shows substantial additional claims being made on no-seller-recourse R&W insurance policies, as compared to policies in which there is seller recourse, it could have a meaningful impact on carriers' underwriting practices and their pricing of premiums for no-seller-recourse policies.

Broadened Scope and Reduced Exclusions

Another prominent recent trend in R&W insurance has been toward broadened scope of coverage and reduced exclusions from coverage. This trend is the result of buyers' desire to reduce "gaps" in coverage under the R&W insurance policy, as compared to the protection from losses resulting from undisclosed issues that they would obtain from the seller in a non-R&W insurance M&A transaction. That is the case because liability resulting from matters excluded from coverage under the R&W insurance policy is typically either effectively borne by the buyer or becomes the subject of a negotiation process among the buyer and the seller, which can slow down the transaction process and weaken the buyer's competitive position versus other bidders in auction scenarios. Sellers have put pressure on carriers to eliminate these gaps to further reduce their residual risk and prevent negotiation with buyers over treatment of excluded issues.

Broadened Scope

The scope of coverage under R&W insurance policies has broadened through reduction of the scope of the stated exclusions to coverage under the policies. Historically, R&W insurance policies have excluded certain categories of issues involving heightened risk – environmental and government payments-related liabilities are some prominent examples – which R&W insurance carriers have viewed as either more appropriately being the subject of a stand-alone insurance policy or presenting such an outsized, unmeasurable risk, as compared to the premium received for the R&W insurance policy, that it cannot be responsibly underwritten. However, increased competition among R&W insurance carriers has led to reduced use of broad categories of exclusions and instead to exclusion only of specific issues relating to the acquired company that are identified by the carrier during its due diligence process.

Reduced Exclusions

Competitive dynamics in the R&W insurance marketplace have also manifested themselves in a reduction in the number of issues that are listed in the exclusion schedules to R&W insurance policies. Carriers want to appear reasonable and market-friendly to R&W insurance brokers, which are increasingly gatekeepers for deal flow for new R&W insurance underwritings, when proposing exclusions from coverage. In situations in which there are several carriers competing for an underwriting, a carrier that proposes a long list of exclusions from coverage under the R&W insurance policy may knock itself out of contention, particularly if the issues proposed to be excluded are perceived as not being material as compared to the size of the transaction.

Consistent with the fundamental premise of insurance as insuring only against unknown liabilities, R&W insurance carriers have customarily excluded issues known by the buyer from coverage under policies. Known issues can be excluded from coverage under an R&W insurance policy either by listing them on the exclusions schedule to the policy or by operation of the provisions in the policy that exclude issues that are known to the buyer's transaction team from coverage under the policy. This results in pressure from buyers to reduce the number of issues included in the exclusions schedule to the R&W insurance policy. Carriers have responded by conducting thorough due diligence in connection with underwriting R&W insurance policies and seeking to put the buyer's transaction team on notice of the matters that they identify during underwriting calls, thereby excluding them as known issues under the policies' terms. This forces buyers to not turn a "blind eye" to issues that should have been known. From the carriers' perspective, however, this is an imperfect solution, as memories can fade from the time when underwriting calls occur and the time, often one or more years later, when claims are made under the policies, potentially creating factual issues about what exactly was known to the buyer's transaction team that lead to disputes over coverage under the policies. Most buyers, however, do not rely on R&W insurance to employ a "blind eye" approach to due diligence, as they would prefer to "turn over the rock" and deal with the consequences square on, rather than ignore issues and pursue claims on the policies later.


As discussed above, the emerging trends in R&W insurance policies discussed in this article have important ramifications for buyers and sellers of companies utilizing R&W insurance policies and R&W insurance carriers, which will continue to play out over the coming years. While many established R&W insurance providers view new market entrants skeptically as short-term players in the industry, the increased competition among carriers is creating a dynamic and constantly evolving market and resulting in more favorable R&W insurance terms for both buyers and sellers of companies.

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