Increasing European demand for Representations and Warranties (R&W) insurance
23 June 2021
The last decade has seen Representations and Warranties (R&W) insurance becoming more popular with the increase in demand across European markets fuelled by litigation around mergers and acquisition (M&A).
Estimates suggest that R&W Insurance - also known as warranty and indemnity (W&I) insurance – was purchased in 49% of deals worth more than Euros 100 million in European markets. Cross border transactions in the European market involving different rules and regulations make it important that exclusions are carefully worded in any policies.
R&W Insurance is designed to cover unknown and unintended breaches of representations and warranties made in M&A agreements and it is seen as a more affordable option in larger deals compared to escrow holdback.
There are two types of R&W insurance policies: buyer-side policies and seller-side policies. A Buyer-side policies protect buyers against misrepresentations by sellers, both innocent and fraudulent. Seller-side policies offer liability protection to sellers for innocent or accidental misrepresentations in purchase agreements.
In a traditional M&A transaction, the seller (or its shareholders) agree to indemnify the buyer for breaches of the seller’s representations and warranties. Often, the indemnity has been backed by an escrow of a portion of the proceeds otherwise payable at the closing. The emerging use of representations and warranties insurance is redesigning this structure.
There are a number of key benefits of R&W insurance who are involved in a M&A deal.
For sellers, the benefits can include the reduction or elimination of the traditional seller’s indemnity for breach of representations and warranties and can allow for the reduction or elimination of an escrow or holdback . It can also ensure fewer contingent liabilities associated with the sale of a company which speeds up the process.
For buyers, the benefits include making the bid more appealing to the seller as the insurance will deal with indemnification protection. It can also create more time for the buyer while increasing protection.