“Traditional” Indemnification Method vs. Representation & Warranty Insurance

Posted on July 20, 2018 by Brad Wood

A recent, significant development in the M&A world has been the significant expansion of the use of Representations and Warranty Insurance (“Rep & Warranty Insurance”). Even only five years ago, Rep & Warranty Insurance was used in transactions only when particularly unique circumstances dictated. There are now more than twenty insurance carriers writing Rep & Warranty Insurance, up from only a few carriers just five years ago.

Historically, Buyers primarily sought transaction risk protection through escrow and indemnification provisions (the “traditional indemnification method”). These escrow and indemnification provisions are often heavily negotiated and can be a contentious part of the transaction process. The use of Rep & Warranty Insurance has minimized much of these negotiations and allowed Buyers, Sellers, and their respective advisors to focus on other important aspects of transactions.

The use of Rep & Warranty Insurance in lieu of the “traditional indemnification method” presents both pros and cons for Buyers and Sellers, and the primary pros and cons are listed in the chart below.

The growth in the use of Rep & Warranty Insurance has largely occurred during what many consider to be a “Sellers’ market”. As a result, many of the Rep & Warranty Insurance terms that have evolved over the last several years have been Seller-friendly, such as fewer coverage exclusions by underwriters, no Seller retention/deductible, accelerated underwriting timeframes with minimal additional due diligence requirements, etc. It will be interesting to see how the use and terms of Rep & Warranty Insurance continue to evolve when the current “Sellers’ market” ends and a “Buyers’ market” begins.

If you have any more questions about Rep & Warranty Insurance, the “traditional indemnification method”, or M&A in general, feel free to reach out to Brad Wood or Jim Pickle through the email links on our bios on the Maynard Innovate Team page.