Reps and Warranties Insurance

Any buyer or seller involved in the sale of a company where there are unknown exposures from the seller's side can benefit from R&W insurance.

The amount of unknown risks depends on the industry. Healthcare and financial institutions typically have higher exposures than hospitality, retail, recreation and professional service companies.

In the past, R&W insurance was primarily used by large corporate transactions. But because of its major protections, R&W is now very common for smaller transactions—including those with values under $10 million, or sometimes even less than $1 million.

Seller benefits:

• Reduce or eliminate post-close litigation
• Improve the overall deal terms by reducing or eliminating escrow amounts
• Provide a third-party guarantee of reps and warranties
• Protect minority and passive sellers, such as inactive family members who may not have knowledge related to the reps and warranties
• Create a backstop for negotiated indemnity obligations—which can be important to fund owners at the end of their life cycle

Buyer benefits:

• Additional and third-party financial resources for breaches of reps and warranties
• Reduce collection challenges above escrow amounts
• Reduce seller escrow requirements—potentially improving offer attractiveness
• Reduce or eliminate post-close litigation
• Increase buyer protection beyond negotiated indemnity caps and survival limitations
• Reduce buyer exposure to seller solvency risk
• Preserve key relationships by mitigating the need for a buyer to pursue claims against management sellers working for the buyer

A seller of a business is typically required to make extensive representations to a buyer in the purchase agreement, and the remedies for any inaccuracies can be costly and lead to litigation. R&W Insurance provides financial protection to a seller or buyer from inaccuracies in these representations and warranties, often easing post-closing disputes.

Because a third party (the insurer) steps in to provide the financial backstop, R&W insurance often reduces or eliminates the need for sale proceeds held in escrow.