This post was written by Courtney Horrigan.
1. Representations and Warranties insurance has quickly risen to become a standard topic of discussion in many merger and acquisitions transaction negotiations.
2. Representations and Warranties Insurance is not a new product – but until recently its use has been limited because of prohibitive premium pricing and buyer concerns as to whether insurers would actually pay on claims. The insurance market is working to bring prices down and establish a payment history.
3. The insurance protects against breaches of contractual representations and warranties that the seller makes in transaction documents. It can be written to cover all or some of the seller’s contractual representations and warranties.
4. Although traditionally it’s been the buyer that purchases representations and warranties coverage, both buyers and sellers can purchase this insurance. If a buyer purchases it, it’s a “buy-side” policy, and if the seller purchases it, it’s a “sell-side” policy.
5. A “buy-side” policy provides first-party coverage – meaning that it allows the buyer to recover from the insurer for its losses due to a seller’s breach of a representation or warranty.
6. A “sell-side” policy provides third-party liability coverage – meaning that it allows the seller to tender to its insurer a claim from the buyer alleging that the seller mistakenly breached a representation or warranty made at the time of closing. (Sell-side policies exclude coverage for intentional breaches.)
7. Representations and Warranties insurance may protect the buyer if it relies upon inaccurate warranted facts when calculating the value of the target company.
8. And Representations and Warranties insurance can allow the seller to reduce or eliminate indemnification reserves or escrows, allowing the seller to distribute the funds from a transaction more quickly.
9. So both buyers and sellers can use Representations and Warranties insurance to resolve impasses in negotiations over whether a specific representation or warranty will be issued, the scope, duration and limits of an indemnity, or the size of an indemnification escrow.
10. Next to cyberliability insurance, Representations and Warranties Insurance may represent the hottest trend in insurance heading into 2015.