July 14, 2014

Representations & Warranties Insurance: Closing in on Closing

By Daniel W. Krane

Representations and Warranties Insurance (“RWI”) was introduced to the U.S. market in the late 1990s, although the product did not gain traction until 2006. For years, parties found RWI to be too expensive and time-consuming to effectively add value to an M&A transaction compared with more traditional indemnification solutions such as escrows, hold backs and other forms of deferred consideration. In addition, parties were skeptical about whether insurers would pay claims, leading to concerns that benefits may be illusory in whole or in part.

In 2006, the cost of RWI began to drop significantly, coverage expanded, and insurers improved the underwriting process by hiring experienced M&A professionals who better understood the needs of the market and could deliver the product in a timely fashion. Even more importantly, as the market matured and insurers began paying claims, parties and their advisors became less skittish about the product.

Today, the RWI market is rapidly growing. Once a tool used largely for risk avoidance and mitigation, RWI is finding new applications, leading to creative bids and deal terms, and providing access to targets that historically were more difficult to acquire. And with the shift in the current M&A landscape to seller-driven auctions, RWI is becoming a more common technique for buyers to distinguish their bids by lowering escrows or even eliminating seller indemnification altogether. In short, RWI is helping more deals get done, and get done more quickly.

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