Representations and warranties insurance, also known as ‘Reps and Warranties’, is the insurance that protects against breaches of contractual representations and warranties that a seller makes in transaction documents during a commercial merger or acquisition. These insurance policies are increasingly purchased for mergers and acquisitions (M&A) transactions to help the buyer and the seller ensure that they both receive what they had agreed upon for the transaction. The policy can be written to cover all or some of the seller’s contractual representations and warranties.
- Capacity is provided for any single transaction.
- Coverage is structured on a case-by-case basis.
- Underwriter due diligence fee of $10,000 – $15,000, depending on size and complexity of the transaction.
- Retention is 1% to 2% of the transaction value.
- Premium is 3.5% to 5% of the amount of insurance purchased.
- Policy period generally matches the survival period for the R&W set forth in the acquisition agreement.
- On a buyer-side policy, policy period can extend beyond the survival period for R&W included in the agreement.
Buyer’s Value Proposition
- Enhance protection for breaches of R&W
- Extend duration of R&W
- Ease indemnity collection concerns
- Distinguish themselves from competing bidders
- Protects key relationships
Seller’s Value Proposition
- Reduce contingent liabilities
- Distribute sale proceeds to reward investors or pay down existing debt
- Protect passive sellers from unintentional breach of R&W
- Eliminate obstacles to completing the sale, which expedites the sale and potentially increases the return
Have questions about this topic or interested in securing quotes? Contact Dan Vecchio
Dan.Vecchio@founderspro.com | 312.219.6588
Dan Vecchio is the Management Liability Practice Leader for Founders Professional. Dan has been involved in hundreds of M&A transactions and can help guide you and your client through the crucial process of obtaining reps and warranties insurance for a M&A transaction. Dan can be reached at Dan.Vecchio@founderspro.com.