Reps & Warranties Insurance: 5 Key Facts You Need to Know

What is Reps & Warranties Insurance?

Reps and warranties insurance (R&W insurance) is a type of insurance that protects the buyer of a business from losses that may arise due to breaches of representations and warranties made by the seller in the purchase agreement. These representations and warranties are typically made by the seller in the context of a merger or acquisition transaction and cover a wide range of matters, such as the financial condition of the business, its compliance with laws and regulations, and the absence of any material disputes or claims.

Why is Reps & Warranties Insurance Important?

R&W insurance is important because it provides the buyer with a level of protection against the risk of financial losses that may arise due to breaches of representations and warranties by the seller. This protection is particularly valuable in the context of complex transactions, where the buyer may not have full knowledge of the target business and its operations.

How Does Reps & Warranties Insurance Work?

R&W insurance is typically purchased by the buyer of a business and covers losses that arise due to breaches of representations and warranties made by the seller in the purchase agreement. The policy typically provides coverage for a specific period of time, such as two or three years, and the amount of coverage is typically based on the purchase price of the business.

What are the Benefits of Reps & Warranties Insurance?

There are a number of benefits to purchasing R&W insurance, including:

• Protection against financial losses: R&W insurance provides the buyer with a level of protection against the risk of financial losses that may arise due to breaches of representations and warranties by the seller.
• Peace of mind: R&W insurance can provide the buyer with peace of mind by reducing the risk of financial losses and ensuring that the buyer is not left holding the bag in the event of a breach of representations and warranties by the seller.
• Due diligence: R&W insurance can help the buyer conduct more thorough due diligence by providing them with a level of protection against the risk of financial losses that may arise due to breaches of representations and warranties by the seller.

What are the Drawbacks of Reps & Warranties Insurance?

There are also some drawbacks to purchasing R&W insurance, including:

• Cost: R&W insurance can be expensive, and the cost of the policy will vary depending on the size of the transaction and the level of coverage desired.
• Limitations: R&W insurance policies typically contain a number of exclusions and limitations, which may limit the scope of the coverage provided.
• Complexity: R&W insurance policies can be complex and difficult to understand, and it is important to work with an experienced insurance broker to ensure that you understand the terms of the policy before purchasing it.

Conclusion

R&W insurance is a valuable tool that can provide the buyer of a business with a level of protection against the risk of financial losses that may arise due to breaches of representations and warranties by the seller. However, it is important to be aware of the benefits and drawbacks of R&W insurance before purchasing it.