Representation and Warranties Insurance

Typically, in a buy/sell acquisition, the seller makes contractual representations and warranties that form the foundation for the transaction.  Representations and warranties may relate to financial statements, accounts receivable, taxes, employee benefits, intellectual property etc.  The seller makes these representations and warranties in good faith in writing, and the buyer relies upon these statements to close the transaction.  However, unanticipated liabilities may arise at a later date if there is a dispute regarding the accuracy of a representation or warranty.

The Representation and Warranties Liability Insurance policy covers the selling company and any designated owners, shareholders, directors, officers, or employees.  The policy is triggered when a lawsuit or written demand is made by a buyer against a seller for a breach of a covered representation or warranty.  Each policy is crafted for a specific business transaction and the insured representation and warranties will vary depending on the nature of the transaction.

Sometimes companies opt to protect themselves from unanticipated liabilities by placing money in escrow.  This protection alternative is much less cost efficient than purchasing insurance.  The premium for a representation and warranties liability insurance policy is significantly less than the actual cost of an escrow account. 

The Coverage Highlights

  • $25 million limit of liability available
  • Right to choose counsel
  • Minimum deductible transaction specific
  • No minimum premium generally 2-8% of limit purchased
  • Aggregate retention (not each loss)
  • Punitive damages covered where allowed by law.
  • Worldwide coverage
  • No excess of insurance clause (on seller coverage)
  • No regulatory exclusion
  • No bankruptcy exclusion
  • No tax liability exclusion
  • No illegal profit/remuneration exclusion (like most D&O policies)
  • No prior and pending exclusion

Other types of merger and acquisition insurance include:

Representation and Warranties Insurance Designed to replace or reduce indemnification requirement under purchase-and-sale agreement.
Tax Opinion Liability Insurance Designed to address potential liability resulting from an adverse tax ruling.
Aborted-Bid Cost Insurance Designed to reimburse the company for external costs resulting from an aborted transaction.
Envirocap Designed to cover cost overruns from environmental remediation projects.
Portfolio Transfers Designed to assume a company’s entire portfolio of multiple liabilities (often casualty or product liability).
Litigation Liability Cap Coverage Designed to cap liability associated with existing litigation.
Litigation Risk Arbitrage Designed to transfer the entire liability for the litigation to an insurance company for a one-time premium
Litigation Retro Funding Designed to provide the insured company an alternative method to finance a settlement.