The Financial Post recently published an article highlighting legal innovations from the US that may see an upsurge of use in the Canadian landscape in 2015, including representation and warranties insurance (R&W insurance).
South of the border, Law360 reported that the use of R&W insurance “exploded, with the market for the liability policy growing roughly fourfold [in 2014].” Although R&W insurance has existed since the 1990s, it was the first time that insurers “struggled to keep up with… record demand.”
R&W insurance provides protection to both buyers and sellers involved in mergers and acquisitions transactions (M&A transactions). Amongst the benefits of R&W insurance, for buyers, R&W insurance can play a key factor in the negotiation process by enhancing and distinguishing bids as against those of their competitors. Seller-side coverage can result in value creation whereby sellers take comfort in providing enhanced representations, warranties and indemnities with the knowledge that some of the risk has shifted to the insurer.
In Canada, the Financial Post noted that the use of R&W insurance may “pick up steam” particularly in the context of private equity firms that are selling off businesses. The appeal to private equity fund managers comes from the fact that they are interested in sales with a “nice return and a clean exit” and as a “customized product designed to indemnify a seller from unexpected surprises”, R&W can act as a gateway to closing for buyers and sellers in M&A transactions.