United States: Representations And Warranties Insurance

Bolstered by the strong United States dollar and cheap energy costs, the current wave of corporate takeovers and mergers shows no sign of abating. In fact, according to last month's bi-annual report on corporate dealmaking from Ernst & Young, 56 percent of responding companies stated that they intend to make acquisitions in the coming year, which was a significant increase from the 31 percent reported in April 2014.Ernst & Young also noted that the number of deals in the pipeline is up 19 percent from this time last year.

As this expanding inventory of corporate transactions moves toward completion, an increasing number are likely to involve the purchase of "representations and warranties" insurance. While R&W insurance has been available in the market for more than 15 years, it has seen rapid growth in only the last five or so years. Whereas mergers and acquisitions lawyers once tried to negotiate around potential problems, lawyers for both sellers and buyers are now increasingly looking to shift the risk of unintentional and unknown breaches of the representations and warranties in a Purchase and Sale Agreement to an insurance company. Nevertheless, among the common types of available insurance products, R&W insurance may be the least understood.

R&W insurance is expressly designed to maintain the value of a corporate transaction—for both the buyer and the seller—by insuring against a breach of a representation or a warranty, thereby reducing or eliminating the need for contractual indemnification provisions, seller escrows, and contingency reserves. In return for assuming this risk, the insurance company receives a fixed premium, typically in the range of 2-4% of the policy limits depending on the complexity of the transaction and the amount of the deductible. Whether this premium is the responsibility of the buyer or seller is typically a function of the deal and which party derives the primary benefits of the insurance.

For example, an R&W insurance policy may be characterized as a "sell-side" policy if it was primarily purchased to permit the seller to liquidate or otherwise cease operations post-closing, free and clear of the potential costs associated with an open-ended indemnification provision. This can occur, for example, when the investors in a real estate investment trust or a private equity fund wish to sell any remaining assets and fully and finally distribute the resulting deal proceeds.

Conversely, an R&W insurance policy may be characterized as a "buy-side" policy if its principal purpose is to distinguish a buyer's bid in a competitive auction process. In such a situation, a buyer can propose the purchase of R&W insurance to take the place of an indemnity from the seller, thereby increasing the value of the buyer's bid without significantly increasing the buyer's upfront obligations. Buyers also commonly purchase R&W insurance when they consider the seller a credit risk.

While R&W insurance can be a valuable tool to bridge thorny negotiations, it is not a complete panacea. Most importantly, R&W insurance—like all forms of insurance—contains a series of exclusions or limitations to coverage. The most significant of these exclusions are those barring coverage for known potential liabilities, including issues discovered during the due diligence process, described in disclosure schedules, or known to any member of the respective deal teams prior to the inception of the policy. This latter exclusion is typically accompanied by a mandatory "No Claims" letter, whereby the insured buyer or seller declares that it is unaware of any breach of the representations and warranties in the Purchase and Sale Agreement. It is critically important that insureds closely scrutinize the language of the "No Claim" letter, given that any material inaccuracy could result in a future loss of coverage.

In addition to the "known loss" exclusions, R&W insurance policies also contain other standard exclusions applicable to types of loss that either are fairly "common" (such as losses from pension underfunding or the misclassification of employees) or are outside the control of either the deal participants or the insurer (such as tax consequences). However, under appropriate circumstances, many insurers may be willing to modify or eliminate certain of these standard exclusions for an increase in the policy premium. Finally, many R&W insurance policies have deal-specific exclusions applicable to a particular representation or warranty that the insurer is unable or unwilling to underwrite.

R&W insurance is also not designed for all corporate mergers and acquisitions. While it can serve a role in smaller or larger deals, R&W insurance is best suited for "middle-market" transactions with a value of between $25 million and $2 billion due to the amount of coverage generally available and that coverage's cost. Higher-value transactions between public companies are typically not suited for R&W insurance because of the greater risk profile associated with those companies and the potentially prohibitive policy premiums, if appropriate limits would be available at all.

As the R&W insurance market expands, such policies are becoming more commonplace. Yet, not all R&W insurance policies are created equal. Therefore, both buyers and sellers may find it beneficial to consult with experienced insurance coverage counsel to ensure the R&W insurance product they are considering will meet their expectations if a claim should arise.

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.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.