Page 6 - Representation & Warranties Insurance

M&A Disputes:

Seller Indemnity versus Representations and Warranties
Insurance (RWI)

Historically, post-acquisition disputes arising from Although seller indemnification is still prevalent in many
alleged breaches of seller’s representations and deals, the introduction of representations and warranties
warranties made as a condition to a deal were matters insurance (RWI) has changed the dynamics of disputes
handled directly between the buyer and seller. As part related to breaches of representations and warranties.
of the closing process, the buyer and seller would often In mergers and acquisitions (M&A) transactions where
agree to place a portion of the deal proceeds in escrow RWI is purchased, direct seller indemnification no
to serve as funding for indemnification should a liability longer serves as the sole recourse for a buyer. Instead,
arise due to a seller’s breach of its representations and a third party — the insurance carrier — is introduced
warranties. This seller indemnification was limited to into the process. In exchange for premium paid by the
a fixed period of time, known as the survival period. In buyer or seller, the insurance carrier provides insurance
addition, the indemnification was capped by a dollar limit, coverage for breaches of the seller’s representations and
typically expressed as a fixed percentage of deal value, warranties, subject to coverage limits, a limited period
and was subject to certain named exclusions. of time during which a claim can be made and certain
exclusions. Although in certain deals RWI will fully
In instances when the buyer sought indemnification from replace seller indemnification (often referred to as no
the seller for a breach, any covered liability would be paid indemnity deals), in others seller indemnification will be
out of the indemnification escrow, with any liability in supplemented by RWI.
excess of that amount to be borne by the buyer. When
the buyer and seller did not agree, the matter may have
been subject to a more formal adjudication process,
whether through mediation, arbitration or litigation.

2 Representations and Warranties Insurance