R&W Insurance: What it is and Why You Need it

If you are in the market for insurance, you may have heard of R&W (representations and warranties) insurance. But what exactly is it? How does it work? And why might you need it? In this article, we will answer these questions and more, so you can make an informed decision about whether R&W insurance is right for you.

What is R&W insurance?

R&W insurance is a type of insurance that protects against financial losses that may occur after a merger or acquisition. Specifically, it covers losses that arise from inaccuracies or breaches of representations and warranties made during the transaction.

When a company is sold, the buyer typically conducts due diligence to verify the accuracy of the seller’s representations and warranties. These may include statements about the company’s financial health, legal compliance, and other important aspects of the business. If the buyer later discovers that any of these statements were inaccurate or misleading, they may be able to file a claim against the seller for breach of contract.

R&W insurance can help mitigate the risk of these claims by providing coverage for losses that result from breaches of representations and warranties. This can give buyers confidence in the accuracy of the information provided by sellers and make deals easier to close.

It is worth noting that R&W insurance is typically purchased by the buyer, but the premium is often split between the buyer and the seller.

How does R&W insurance work?

When R&W insurance is purchased, the insurer will conduct its own due diligence on the target company to confirm the accuracy of the seller’s representations and warranties. If the insurer is satisfied with the results, it will provide coverage for losses that result from breaches of those representations and warranties.

The coverage provided by R&W insurance typically lasts for a set period of time after the transaction, such as 12 or 18 months. If a breach of a representation or warranty occurs during this time, the buyer can file a claim with the insurer to recoup losses.

The amount of coverage provided by R&W insurance varies based on the size of the deal and the level of risk involved. In general, it will cover a percentage of the purchase price, such as 10% or 20%. The buyer and seller can negotiate the terms of coverage and the premium paid for the insurance.

Why might you need R&W insurance?

If you are involved in a merger or acquisition, R&W insurance may be a good option for you. Here are some reasons why:

Protection against unknown risks

Despite the best efforts of buyers and sellers, it is not always possible to uncover every potential risk during due diligence. R&W insurance can provide protection against unknown risks, giving buyers peace of mind that they are covered in the event of a breach of a representation or warranty.

Improved deal terms

If a seller is able to offer R&W insurance as part of a deal, it may make the deal more attractive to buyers. This can lead to better deal terms for both parties, such as a higher purchase price or more favorable financing terms.

Reduced litigation risk

If a breach of a representation or warranty occurs, it can lead to lengthy and expensive litigation. R&W insurance can help mitigate this risk by providing a quicker and more efficient way to resolve disputes.

FAQ

What types of risks does R&W insurance cover?

R&W insurance typically covers financial losses that result from breaches of representations and warranties made during a merger or acquisition. This may include losses related to financial performance, legal compliance, intellectual property, and other important business aspects.

Who purchases R&W insurance?

R&W insurance is typically purchased by the buyer, but the premium is often split between the buyer and the seller.

How long does R&W insurance last?

The coverage provided by R&W insurance typically lasts for a set period of time after the transaction, such as 12 or 18 months.

What is the cost of R&W insurance?

The cost of R&W insurance varies based on the size of the deal and the level of risk involved. In general, it will cover a percentage of the purchase price, such as 10% or 20%. The buyer and seller can negotiate the terms of coverage and the premium paid for the insurance.

Is R&W insurance required for all mergers and acquisitions?

No, R&W insurance is not required for all mergers and acquisitions. It is typically used in larger deals or deals where there is a higher level of risk involved.

Conclusion

R&W insurance can be a valuable tool for buyers and sellers involved in a merger or acquisition. It provides protection against financial losses that may result from breaches of representations and warranties, and can help facilitate deals by giving buyers confidence in the accuracy of the information provided by sellers. If you are considering R&W insurance, be sure to speak with a qualified insurance professional to determine if it is right for your specific situation.