AT&T and Time Warner. Sprint and T-Mobile. Sinclair Broadcast Group and Tribune Media.
News of a proposed or completed corporate merger seems to be in the headlines on a regular basis nowadays. Indeed, M&A activity has been high in all sectors and has shown no sign of slowing down.
But as any investor knows, not all mergers deliver on their promise. Cultural clashes and turf wars can spoil post-integration plans. The result? Dilution of a company’s brand, a plunge in the company’s stock price and decimation of shareholder value.
All of this has us thinking about Representations and Warranties Insurance (R&W), a line of coverage that has become more commonplace in the past couple of years, but which remains unfamiliar to many.
In a nutshell, representations and warranties insurance protects both buyers and sellers against financial losses, including costs associated with defending claims, for certain unintentional and unknown breaches of the seller’s representations and warranties made in the acquisition or merger agreement.
In other words, it takes out some of the anxiety of suspicion present in most deals.
For example, the seller of a company may represent that its underground storage tanks are in good condition. If a serious leak is discovered after the purchase, the buyer can seek recovery for repair and clean-up costs from the seller’s representations and warranties insurance policy.
Another advantage in turning to a representations and warranties policy is that it allows the seller to lower the amount of money held in escrow while the buyer does its due diligence. No need to set aside those dollars in escrow if an insurance policy is in place, right?
The retentions (or deductibles) in R&W policies typically are set at 1% of the deal, an amount that can be borne by either the buyer or the seller or a combination of the two.
Policy periods generally line up with the period of the representations and warranties set forth in the acquisition agreement, although buyer-side coverage can be extended beyond those provisions, giving the buyer more time to uncover any problems.
As you might expect, most R&W policies will include a range of coverage exclusions or limitations. For example, the buyer will not be able to recover for liabilities it knew about when the policy was bound.
Regardless, R&W has gained market acceptance over the last few years, and a significant number of new insurers have entered the market.
We’ve seen R&W insurance most often in acquisitions of large and mid-sized companies but increasingly lower-middle market firms as well. If you’re thinking about merging, buying or selling your company, you’ll want to think about R&W coverage. But one caution for buyers and sellers alike: it’s essential to start shopping for R&W insurance early in the process.
Jeff Parent is a CCIG Insurance Adviser. Let him know if you have questions or concerns. Reach him at JeffP@thinkccig.com or 720-330-7918.
CCIG is a Denver-area insurance brokerage with the full-service capabilities of a national brokerage. We do more than make sure you have the right policy. We also help you manage your long-term cost of insurance with our risk and claims management expertise and a commitment to service excellence.
Also read: Will D&O Insurance Cover Indictments in Theranos Case?
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