United States: Current Trends In Representation And Warranty Insurance

In any business acquisition, the lure of great profit is accompanied by the specter of risk. For mergers and acquisitions practitioners, the allocation of unknown business risk between the buyer and the seller is generally one of the most contentious aspects of a deal negotiation. Although both sides place great value on the cash flows from the target business, neither party wants to be responsible for hidden compliance violations, unpaid back taxes or valuation missteps caused by financial statement errors. Historically, the parties that were willing to hold transaction risk were limited to those with a direct interest in the deal: the buyer and the seller. In the past decade, however, a segment of the insurance industry has started shouldering a piece of the risk in M&A deals for a price.

Representations and warranties (R/W) insurance policies are now offered by a broad range of underwriters. These policies allow buyers and sellers to shift a portion of transaction risk to third-party insurers. These policies typically come in two distinct forms: "seller-side" policies and "buyer-side" policies. Although similar in many respects, buyer-side policies are more common in the market, as they eliminate the need for the buyer to assert claims beyond the insurance policy "retention" (akin to a deductible) against the seller before pursuing recovery under the policy. Despite its name, it is not uncommon for sellers to require the use of a buyer-side policy in a sale transaction as a way to maximize unencumbered closing proceeds.

With a buyer-side R/W policy, if there is a breach of one of the seller's representations or warranties in the purchase agreement, the buyer is able to recover the resulting losses from the insurer. Like other insurance policies, a retention must be eroded by claims before coverage is provided. Retention amounts of between 1 and 1.5 percent of enterprise value are typical for deals over $50 million, with a 2 or 3 percent retention not unusual for a $25 million transaction. In a common scenario, the insurer will price the coverage assuming that the buyer and seller will each bear half of the retention. This gives the buyer incentive to do thorough diligence and the seller incentive to actively negotiate the reps and warranties. In many cases, the retention will "step down" to half the original amount after 12-18 months, with only the buyer's share of the retention remaining after that point. For sellers, this frequently means that they can walk away from a transaction leaving behind only 0.5 to 1 percent of the purchase price in escrow for 12-18 months, with the escrowed amount representing their entire transaction exposure (except in the extraordinary case of fraud).

Underwriters currently offer a broad range of coverage amounts, with insurance in excess of $500 million readily available. On the other end of the spectrum, policy amounts below $5 million are generally not economical for the insurers. As such, assuming a buyer will want coverage equal to at least 10 percent of enterprise value, finding insurance for deals below $50 million of enterprise value is difficult. However, an increasing number of parties have started recognizing value in freeing up closing proceeds with insurance and are willing to buy a $5 million policy for transactions with values below $50 million.

While a variety of factors can impact the cost of coverage (e.g., the nature of the business being sold and the size of the deductible), R/W insurance typically costs between 3.5 to 4.5 percent of the policy limit, including the premium, fees and taxes. For example, a $10 million policy typically costs between $350,000 and $450,000. This is a one-time expense. Of this amount, $25,000 to $45,000 is the underwriting fee, which is paid to the insurance carrier in advance of closing to allow them to hire outside counsel to help them underwrite the transaction. The balance is paid at closing. For example, assuming a typical policy with a limit equal to 10 percent of enterprise value, the cost of coverage is 35bps to 45bps. In exchange for this added expense, a significant portion of the sale proceeds is freed up at closing. With the influx of new carriers into the R/W insurance market, pricing has trended downward. While it is unlikely that policy costs will sink below the low-end of the range noted above in the near future, the increase in competition in recent years has forced insurers to become more accommodating to purchasers, both in terms of pricing and coverage.

American International Group Inc. has a substantial presence in the R/W insurance market. In a January 2016 report, AIG noted that, during the 2011-2014 period, claims were made against 15 percent of policies written for transaction sizes of $100 million or less. Claim rates were only slightly lower for transaction sizes above this threshold. The most frequent source of claims was financial statement issues, followed by taxes, contract matters and intellectual property issues.

A buyer-side R/W insurance policy offers benefits to both sides in a transaction.

For buyers:

  • Buyers get comfort that they have recourse against a creditworthy insurer that wants to avoid a reputation for denying worthy claims.
  • In an auction situation, a buyer can include a R/W insurance policy as part of a bid to help distinguish its offer.
  • Buyer-side R/W policies commonly offer longer survival periods (i.e., period of time in which a counterparty can assert a claim) than those in a typical market purchase agreement. A typical policy provides three years of coverage for general representations and six years of coverage for fundamental and tax representations.
  • Because the seller's exposure is significantly less than in an uninsured deal, buyers may find that sellers are less inclined to fight tooth-and-nail for specific contract points (e.g., definitions of "loss" and materiality scrapes).
  • Currently, the trend among underwriters is to provide buyers with the potential to make a claim for "multiple of EBITDA" or "multiple of earnings" type damages, which are typically resisted by sophisticated sellers.
  • With a financially distressed seller, a R/W policy can provide a means of recourse to a buyer when indemnification rights against the seller are basically meaningless.
  • Finally, in some transactions, management sellers become part of the buyer's team after closing, and a R/W insurance policy allows a buyer to assert a claim against a third-party insurer rather than against one of its insiders.

For sellers:

  • A R/W insurance policy allows sellers to walk away from a deal leaving a relatively small portion of the purchase price at risk for only a short period of time.
  • For private equity funds nearing the end of their life cycle, a R/W insurance policy can help provide certainty with respect to the fund's liquidating distributions.
  • A R/W insurance policy can mitigate concerns that minority sellers may have about being joint-and-severally liable for indemnification claims.

Buyer-side R/W policies can be a good fit in many M&A transactions. However, a transaction that includes a R/W insurance policy must be carefully structured to appropriately shift the claim risk to the third-party insurer. Some fundamental changes to a typical purchase agreement are generally needed to reflect the structure, and the insurance policy and declarations must be scrutinized to ensure that the underwriter is providing all of the coverage that the buyer expects.

"Current Trends in Representation and Warranty Insurance" was originally published in LAW360.com and co-authored by shareholder Nate Neuberger and managing director Eric Ziff at Aon's transaction solutions group.

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
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
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must 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