Page 13 - Representation & Warranties Insurance

The Underwriting Process

Comparison of RWI Underwriting Diligence and specific representations and warranties that the insurer
Deal Diligence will not cover. In contrast to buy-side or sell-side due
Prior to executing a transaction, both buyers and diligence, RWI due diligence often is conducted over a
sellers may perform due diligence. A seller may relatively short time frame, such as one week.
perform sell-side due diligence for the purpose of
assessing the value of its company, identifying risks Information Considered During RWI Underwriting
that may arise during a buyer’s due diligence process, Diligence
or identifying weaknesses in its business. A buyer may As mentioned, an insurer often relies on due diligence
perform buy-side due diligence to serve as the basis for already performed by the buyer or seller for purposes of
representations and warranties it will seek from a seller carrying out its own due diligence. Given the accounting,
as part of the deal, to support or revise the purchase financial, tax, legal, and other technical components of
price it will pay for the target entity, or to identify risks a seller’s representations and warranties, the insurer
or synergies of the target entity. will often retain outside counsel and financial experts
to assist during the due diligence phase. Sources of
Many third-party advisers are involved in the buy-side information reviewed by the insurer and its advisers often
and sell-side due diligence. Accountants, financial include the following:
consultants, investment bankers, and outside counsel
bring expertise in financial, operational, strategic, legal, • The deal data room. The repository for information
regulatory and other aspects of the deal. exchanged between the buyer and seller during the deal
due diligence process.
To facilitate the transfer of confidential information, a
data room will often be created to store documents, • Buy-side or sell-side internal or third-party diligence
data, and other information that is responsive to the due reports. These reflect the findings by the buyers, sellers,
diligence process. Depending on the size and complexity or their advisers after due diligence is conducted in a
of the deal, the due diligence process conducted by a particular area (for instance, financial).
buyer or seller may take place over multiple months.
• Discussions. With the deal team and target entity
When an insurer performs due diligence for the management.
purpose of underwriting RWI, the insurer will often
rely on diligence that has already been performed by • Deal-related documents. Such as operative transaction
the buyer or seller. In addition, RWI due diligence is agreements and disclosure schedules.
focused on the risk that a seller will breach one or more • Deal-specific requests. For example, if a particular area
of its representations and warranties in the operative of concern is highlighted within one of the buyer’s due
transaction agreement and will not cover any areas that diligence reports, the insurer may request more specific
are excluded from RWI coverage. Further, the results information regarding this risk to determine whether
of the insurer’s due diligence may result in changes to any related representations and warranties will be
the RWI policy terms, such as additional exclusions for covered by the RWI policy.

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