Representations & Warranties Insurance
Representations & Warranties (Reps & Warranties) insurance is designed to provide insurance coverage for breaches of representations and warranties statements made by the seller in a purchase agreement. Sellers are usually required to indemnify the buyer for breaches of the representations and warranties made in the purchase and sale agreement, and often required to hold some level of transaction proceeds in escrow to ensure that funds are available in the event of a breach. Reps & Warranties insurance is intended to supplement or even replace seller indemnity obligations by insuring all (or most) of the representations made within the purchase agreement.
The popularity of this insurance has virtually exploded because it may effectively reduce or replace the seller’s indemnification or escrow requirements. Recently, some sellers (primarily private equity firms) have even taken a “no indemnification, no escrow” position. In those cases, the sellers are literally dictating that buyers consider insurance if they seek to get more comfort on the transaction. Indeed, smart buyers are looking for risk mitigation, which is driving interest in this product. Additionally, sellers want to distribute the full proceeds without waiting for indemnification periods to run out or escrow monies to be returned. In many cases, the cost of insurance may be less than the cost of capital tied up by a seller’s escrow, so the insurance may deliver upfront value even without claims. Not surprisingly, this insurance product has achieved substantial popularity, specifically for deals whereby a privately owned company is being purchased for a price in the $25M to $3B range. Insurance is available for both asset deals and stock deals, though the latter deal type is obviously more at risk.
This whitepaper will discuss the following:
- Quick Marketplace History
- Items of the Purchase Agreement to Insure