Representations & Warranties Insurance

RWI protects buyers against financial losses (including defense costs and, in most cases, investigation costs) stemming from breaches of representations and warranties in the purchase agreement that are unknown to buyer at closing.

RWI can reduce or eliminate a seller’s escrow and provide buyer with a more attractive indemnity solution than would be available without the benefit of RWI.

RWI has advantages for both sellers and buyers.

For sellers, deals with RWI typically involve smaller or no escrows, freeing up sale proceeds for the sellers at closing. This can be particularly appealing to passive sellers hoping to sell a business they didn’t directly run without fear of post-closing claims.

For buyers:

• RWI typically provides for a much longer period to make a claim than is traditionally available from seller—typically three years for general representations and six years for tax and fundamental representations.
• RWI can provide significant post-closing recourse when no or limited seller indemnity is available in the purchase agreement.
• RWI eases collection concerns, as pursuing a claim with a creditworthy insurance carrier is often far more appealing than making a claim against a seller group.
• RWI can reduce the likelihood of post-closing disputes between buyers and sellers and improve long-term relationships with sellers, in particular those who continue employment with the buyer or maintain an equity interest in the go-forward entity.

Claim Frequency: Approximately 20% of RWI policies experience a claim notification, typically within the first 12 to 24 months post-closing. Notably, most traditional seller indemnity obligations expire within 12 months of a transactions closing. Absent RWI insurance, a buyer would have no recourse for claims arising after that period.

Claim Types: Common claims relate to breaches of the financial statements, tax matters, compliance with applicable laws, and condition of assets representations.

Claim Process: Resolving an RWI claim requires back and forth with carriers, who need to understand the specifics of both the breached representation and the resulting financial loss. Denied claims are rare and claims heading to litigation or arbitration are exceedingly rare. Nonetheless, certain insurers set themselves apart by driving claims toward a commercial resolution quickly, fairly, and without undue administrative burden on insureds.