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Representations and Warranties Insurance

All mergers and acquisitions (M&A) involve some risk, no matter the deal size or scale. As companies pursue M&A in an active but volatile market, deploying the appropriate risk management framework is critical.

Representations and Warranties Insurance (RWI) can be used as a vehicle to transfer a portion of risk and liability to the insurance provider. RWI offers both buyers and sellers protection against potential breaches of a seller’s representations (what the seller states as true, to the best of their knowledge, about the past, present and/or future state of their company) and warranties (the guarantee of indemnity if the representations are false) in an M&A agreement.

Breaches of an M&A agreement can be costly, timely and contentious. To that end, RWI coverage is like a prenuptial agreement — it can detail in advance what defines a breach of the agreement, the financial ramifications if there is a breach and the course of action if the deal ends in “divorce.” This affords the buyer and seller peace of mind in knowing how claims covered under the policy will be settled, while also providing a foundation for more agreeable negotiations.

Representations and Warranties Insurance

Benefits of RWI Coverage

Customizable. Since every deal is unique, RWI policies are customizable and negotiable. For buyers, RWI provides assurance that claims or losses under the policy will be covered; whereas sellers may purchase RWI to provide liability coverage in the event of a breach of the agreement.

  • Due Diligence. Insurance carriers will review the due diligence that has been conducted and will base the policy on the available information. This comprehensive review also helps a buyer understand where there may be information gaps or unknowns about the company it is purchasing.
  • Access to Capital. Because the insurer assumes financial risk for the seller in breaches covered under the policy, sellers do not need to have as much money in escrow to cover unanticipated expenses. This can make a deal more attractive to a seller who receives earlier, increased access to the deal payout than if money was held in escrow for an extended period.

RWI Considerations

With an RWI policy, there are important considerations that should be addressed in your initial conversations with an insurance provider.

  • Fees and Premiums. Typically, deals valued at $15 million or more are an appropriate starting point for RWI policies due to minimum premiums and underwriting fees. The parties may also negotiate who is paying the premium and if the deductible will be split between the two entities.
  • Limitations and Exclusions. Be sure to work with your insurance adviser to understand what is or could be excluded or limited in coverage under an RWI policy.
  • Lender Requirements. Depending on the entity that is serving as a lender in an M&A deal, RWI may be required under the terms of the agreement.

It is important to work with a trusted insurance provider to understand the full scope of the requirements, opportunities and challenges that an RWI policy presents to determine if it is the right fit for your deal.

Insurance products are sold by First National Insurance Agency, LLC, and its licensed agents. Insurance products are not insured by the FDIC or any other government agency, not a deposit of, or guaranteed by F.N.B. Corporation or its affiliates. May lose value (if product involves an investment risk).

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