Representations and Warranties Insurance

What is Representations and Warranties Insurance?

Representations and Warranties Insurance (RWI) is utilized in mergers and acquisitions to reduce both buyers’ and sellers’ risk in a transaction in addition to minimizing the time needed to close a deal.

Why is this necessary when representations and warranties are in the agreement and funds to account for such losses are withheld from the transaction?

Funds held in escrow can either be replaced or supplemented by a RWI policy, therefor keeping a buyer’s concerns at ease and reducing the financial burden on the seller.

 

Who is a candidate for Representations and Warranties Insurance?

Any company involved in the buy-side or sell-side of an acquisition.

Seller protection:  RWI allows sellers to make a clean exit by reducing their liability from future claims for unintentional non-disclosure or breaches.

Buyer protection:  RWI supplements the indemnification provided by sellers and extends the discovery period allowing additional time to detect inherited problems from the transaction.

Strengthen an offer:  A buyer who purchases RWI gives them the ability to not require any indemnification from the seller, thus speeding up the transaction and reducing seller burden.

 

Claim Scenarios

A private equity firm relied on the representations of a payment processor before acquiring it for $81M.  The processor ended up being overleveraged, which ultimately led to its bankruptcy and an attempt to claw back $47M from the former CEO.

One of the largest payment processors acquires a payment technology company for $1.65B.  Rather than have the seller hold $165M in escrow for 2 years to protect the buyer, they require only $33M.  The remaining $132M is covered by a representations and warranties insurance policy at cost of approximately $3M.  The cost of the insurance is deducted from the purchase price and the seller is able to make a clean break from the transaction without the financial burden of leaving $165M in escrow.

 

Scenarios

A buyer is concerned about the likelihood a seller will be able to perform the agreed indemnity obligations.  The buyer demands an escrow which the seller is unwilling to provide.  The seller instead purchases a RWI policy to complete the transaction.

A private equity firm relied on the financial representations of a payment processor before acquiring it.  The processor ended up being overleveraged, which ultimately led to its bankruptcy and an attempt to claw back funds from the former CEO.  The losses caused by the financial misrepresentations are paid by the policy.

An ISO is looking to expand its portfolio by acquiring another company and would like to stand out against other potential buyers.  Rather than require an escrow to backstop the seller’s indemnity, they purchase a RWI policy.  The seller accepts the offer as opposed to the others which required an escrow.