Representations and Warranties” insurance has become a strategic option that can help clients mitigate risk and successfully buy and sell businesses. Over the past fifteen years, Reps and Warranties coverage has evolved to become a useful tool for getting deals done and use of the product has become increasingly popular.
In an excellent article titled, “Representations and Warranties Insurance as Deal Making Tool,” published in the New York Law Journal on September 24, 2012, Howard B. Epstein, a partner at Schulte Roth & Zabel, and Theodore A. Keyes, Special Counsel at the firm, provide useful and practical advice to the practitioner concerning the advantages and potential disadvantages of purchasing this coverage.
As Epstein and Keyes explain, Reps and Warranties policies come in two types – buyer-side and seller-side policies. When a buyer obtains a buyer-side policy, the insurance is often intended to replace the indemnification obligations of the seller. The benefit of a seller-side policy is that the seller can walk away from the transaction at closing without having to worry about trailing liabilities arising from an unanticipated inaccuracy in the representations and warranties made in the acquisition agreement.
As Epstein and Keyes observe, the seller-side policies provide advantages to private equity or venture capital funds that need to distribute all proceeds to their limited partners after closing without incurring the risk of having to request the return of funds to fund an indemnification obligation on a later date. Similarly, seller-side coverage provides security to sellers who plan to use the proceeds from the sale to fund their retirement. On the other side of the equation, buyer-side Reps and Warranties policies may be used as a replacement for a more complete seller indemnity.
As Epstein and Keyes point out, every deal is different, and it is always important to review the specific terms of the proposed insurance policy to make sure it meets the needs of the particular transaction. However, in the right circumstances, Reps and Warranties insurance can be used strategically to provide a practical way for parties to a transaction to allocate their risk and potentially resolve issues that might stand in the way of completing their deal.
In particular, Reps and Warranties insurance may be particularly helpful in an environmental context. As Reps and Warranties insurance has evolved, underwriters have developed processes that are more streamlined and less obtrusive. Increasingly, parties to deals recognize that it may be appropriate for an insurer to have a seat at the table during negotiations. The Epstein/Keyes article should be your first stop in evaluating the pros and cons of Reps and Warranties coverage.