Page 4 - M&A

S4 | MONDAY, OctOber 26, 2015 | Mergers & Acquisitions | nylj.com
Use of Representations and Warranties Insurance Grows in Middle-Market Transactions
By HoWard T. SPilko
and SCoTT a. aBraMoWiTz
Representations and warranties insur- ance (R&w insurance) is being used by middle-market M&A deal professionals at an unprecedented rate. In this article, we will discuss market trends in the use of R&w insurance, key drivers behind this explosive growth, the underwriting process and key considerations for buyers and sell-
HoWard T. SPilko is a partner at Kramer Levin Naf- talis & Frankel, where he is co-chair of the corporate department. SCoTT a. abraMoWiTz is an associate in the department.
ers in structuring transactions with R&w insurance.
What Is R&W Insurance?
R&w insurance is a transactional risk prod- uct that provides coverage to a buyer or seller against losses arising out of a breach of the seller’s or target company’s representations and warranties in connection with an acquisi- tion, divestiture, merger, or other business transaction. R&w insurance is an effective tool in bridging gaps between buyers and sellers negotiating M&A transactions. For example, R&w insurance is often effective where a buyer cannot convince the seller to agree to the desired level of indemnifi- cation, or alternatively, where a buyer has
concerns about the seller’s ability to satisfy its indemnification obligations after closing. As noted below, R&w insurance also serves as an effective component of a buyer’s bid package in a competitive auction as a means to differentiate its bid.
In a seller-side R&w insurance policy, the seller is the insured party, and the insurance carrier reimburses the seller for losses that the seller is required to pay the buyer for breaches of its or the target company’s repre- sentations and warranties in the acquisition agreement. Seller-side policies serve to back- stop the seller’s indemnification liabilities by shifting the risk of loss for post-closing indem- nification claims to the insurance company.
In a buyer-side R&w insurance policy, the buyer is the insured party, and the insurance
company pays the buyer directly for any losses arising out of breaches of the seller’s or the target company’s representations and warranties in the acquisition agreement. A buyer-side R&w insurance policy has certain advantages to the insured when compared to a seller-side R&w insurance policy. For instance, the effective scope of the knowl- edge exclusion, which excludes from policy coverage loss where the insured’s deal team had actual knowledge of the breach at policy inception, is more narrow in the context of a buyer-side R&w insurance policy relative to a seller-side R&w insurance policy.
while the overwhelming majority of R&w insurance policies currently being issued by insurance carriers are buyer-side policies, the determination as to whether the buyer
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