Representations & Warranties

Representations & Warranties

Our Representations & Warranties Difference

Simkiss & Block offers Representations & Warranties Insurance (RWI) to facilitate getting your deal to closing. Whether the total enterprise value of the transaction is $30 million or $30 billion, our team will ensure that the terms and capacity you need are available.

Advantages of Representations & Warranties Insurance

Representations & Warranties Insurance has become widely popular for the following reasons:

    • It can ease and quicken negotiations of an indemnification package, including broad coverage availability for “no survival” deals.
    • It enables a buyer to have a party to pursue other than the management team behind which it just invested if a breach occurs.
    • It allows sellers an immediate and clean exit by replacing proceeds that would otherwise have been tied up in escrow for years post-closing.
    • Coverage can now often be negotiated to include a full materiality scrape, both for the purposes of determining if there has been a breach, and for determining damages.
    • The underwriting process has been streamlined considerably, especially when managed by an experienced representations & warranties insurance broker.

Representations & Warranties Insurance Circumstances

Simkiss & Block has experience handling the unique circumstances that come with RWI. The following are a few examples of challenges ways in which we can help our clients.

Seller Liability Minimization/Escrow Liquidation

The private equity firm wants to limit post-closing liabilities and/or take escrow holdback off the table, so that more of the full deal proceeds can be distributed, but buyer wants collateral for survival period of indemnification for reps and warranties.

Distinguishing Auction Bid Attractiveness

The buyer wants to enhance the attractiveness of their proposed purchase offer by including RWI policy to alleviate some or all of the seller’s indemnity and escrow/holdback.

Enforceability Of Indemnification

Where the buyer would be concerned about the availability of
recourse for breach of the reps. and warranties, due to credit
risk of seller or desire for longer survival period for some reps
than seller will provide or for other technical reasons.

Policy Overview

Policy Structure

  • Policy limits usually % of deal price. Often equal to some or most of escrow holdback. 10% of Total Economic Value (TEV) is common for policy limit but this is flexible. Prorated limits are available for minority investments.
  • Policies require a retention/deductible, often 1% of deal value but can be customized to match other provisions and typically decrease over time.
  • Policy premiums vary per deal, usually in range of 2.5-3.5% of policy limit. Underwriting fee also usually required to cover insurer expert costs, usually $25,000 -$40,000.

Policy Coverage

  • Policy language customized deal by deal but generally cover all reps & warranties in agreement unless otherwise specified.
  • Issues not covered include known liabilities, issues uncovered during diligence and “new new” issues which first arise prior to closing.
  • In addition to a percentage limit for all reps & warranties, some insurers will offer coverage excess of that limit for fundamental reps only, which is typically inexpensive.

In today’s marketplace, coverage is often available for unknown breaches of all the seller’s reps and warranties, but this can vary by industry and especially by the level of diligence performed by the buyer in high-profile areas such as environmental, employment issues such as pension funding, wage and hour, FCPA, etc. The detailed language of the RWI policy itself is typically negotiated on a deal by deal basis between the insurer and the team of the buyer’s counsel and RWI broker, as each policy needs to be customized based on the terms of coverage and the dynamics of the underlying transaction.

Underwriting Process

The basic process for underwriting RWI takes place in 3 phases.

Phase 1: Marketing

  • NDAs with prospective insurers
  • Summary info to underwriters
  • NBILs issued, usually in days

Phase 2: Underwriting

  • Insurer selected, fee agreement executed
  • Diligence info provided and underwritten
  • Underwriting conference call

Phase 3: Policy Negotiation

  • Policy wording negotiated
  • No claims warranty provided
  • Policy issued and premium funded