Page 11 - FINAL - Brouse IR Year-End Newsletter 2021_Neat

Utilizing Representations and Warranties Insurance in M&A Transactions and Related
Financing (Continued from page 10)
control minority investments. In addition to acquisition financing as additional insureds. By
the standard exclusions discussed below, R&W having the buyer and lender as named insured
insurance does not cover breaches in covenants and additional insured, respectively, they can be
in the purchase agreement. paid directly from the insurer. This mitigates any
collectability issues or controversy presented,
Policies Can be “Seller Side” or “Buyer Side” which is desirable in distressed transactions or
R&W insurance can be purchased as either transactions with more than a single selling
“Seller Side” or “Buyer Side” coverage. shareholder. In the event of a breach of any

R&W in the transaction, after accounting for the
Seller Side policies serve as a liability policy retention, the insured would receive a payment
providing coverage to the seller for its liability to offset their loss up to the maximum policy
for claims for breach of R&W in the purchase limits.
agreement made to the buyer. This type of
policy would pay the seller as named insured, Introducing R&W Insurance in the Deal
not the buyer. By comparison, a “Buyer Side” Sellers utilizing an investment banker led
policy is a form of first-party coverage that competitive bid or auction process often
allows the buyer to be compensated directly stipulate R&W insurance as a bid qualification
by the insurer. A common added variation to and a means they are proposing to avoid an
“Buyer Side” policies also protects the seller by escrow. By comparison, buyers seek R&W
preventing the insurance company from seeking insurance when indemnity is limited or absent,
recovery from the seller except in cases of fraud. or when escrow is not able to be obtained.
We highly recommend this variation be explored Since indemnity provisions are often the most
for our clients that are sellers. negotiated section in purchase agreements,
R&W insurance provides a mechanism for
When Hylant assists its clients in obtaining parties to bridge the gap by shifting risk of
R&W insurance, the named insured is often the breaches in R&W made by the seller and the
buyer in the transaction, with lenders providing collectability of indemnity to an insurer in

R&W INSURANCE BENEFITS

BUYERS SELLERS LENDERS

Adds protection to indemnity Provides backstop or replaces Offers longer term than reps
cap and survival periods negotiated indemnity and warranties in purchase
agreement
Provides recourse in absence Eliminates or reduces escrow
of seller indemnity Allows lenders to be additional
Allows minority sellers to insureds; and collectability is
Preserves key relationships avoid joint and several direct from insurer
liability
Ensures collectability Enhances underwriting
Provides peace of mind for
Enhances competitive bids
family and individual sellers Mitigates risk presented
Offers protection to deal Enhances disclosure schedules by escrow or absence of
financing creditors conditions precedent

Facilitates prepayments in
specific circumstances

(Continued on page 12)

Your Coverage Advisor 11