Representations and warranties insurance (R&W insurance) is a new option whose objective is to facilitate the successful completion of a company’s purchase and sale operations.
Company purchase and sale transactions evolve very rapidly as they are largely based on Anglo-Saxon law. This means that lawyers and other professionals specialising in mergers and acquisitions have to adapt to the requirements of their clients and offer alternative solutions to certain situations that could truncate the operation.
Usually, in company purchase and sale contracts, the seller makes a series of statements in order to guarantee their veracity and minimize potential future contingencies. These statements (representations) are accompanied by guarantees (warranties) so that, in the event of non-compliance, the seller can be held contractually liable and executed.
The most frequent guarantees included in company purchase and sale contracts are price adjustments, deferred price, escrow account and bank guarantee. However, the usual practice tends to include more and more frequently the figure of the insurance of representations and warranties (R&W) in these contracts.
What is representations and warranties insurance?
Representations and warranties insurance (R&W) is a tool used to reduce or eliminate the risk of non-compliance derived from the statements and guaranties included in the sales contract, transferring said risk in full or in part to the insurer or co-insurers.
This type of insurance has evolved over time, extending its coverage and reducing its cost. Although its use has been widespread in the United States for several decades, in Europe and specifically in Spain it has only recently begun to be used very timidly, mainly due to the scarce number of insurers offering this service and the lack of knowledge among professionals in the mergers and acquisitions sector.
With time and the evolution of purchase and sale operations, it is increasingly common to find this insurance as a valid solution when it comes to guaranteeing the statements made by the buyer, given that the underwriting process has been simplified and prices have decreased. The insurance companies themselves have adapted to the reality of companies’ purchase and sale operations and to the needs of the customers in terms of coverage and franchise.
It should be noted that this insurance can be used both in the purchase and sale of assets and in the purchase and sale of shares or participations, as well as in merger and spin-off processes.
Types of representations and warranties insurance
There are two types of representations and warranties insurance (R&W): the policy contracted by the seller and the policy contracted by the buyer.
The policy taken out by the seller, also known as the Seller-Side Policy, covers potential breaches of contract that may arise from the representations and warranties contained in the Sales Contract. It is, therefore, contractual civil liability insurance.
The policy taken out by the buyer, the Buyer-Side Policy, covers the damage or patrimonial losses that the buyer may suffer as a result of the seller’s failure to comply with the representations and warranties contained in the Sales Contract. It is, therefore, a damage insurance.
This last type of policy is the most common and advantageous for both parties. One of its main advantages is the possibility that this type of insurance covers misconduct or fraudulent action by the seller, a circumstance that could never occur with the other types of insurance, since the seller would be insured himself.
However, this is not the only aspect to take into account when taking out a representations and warranties insurance policy (R&W). Each policy has its advantages and disadvantages, and the specific circumstances of each purchase and sale operation must be studied to determine which insurance is the most suitable.
This article is not considered as legal advice