Many types of insurance are viewed only as a form of protection against downside risk. But certain coverages can do much more than offer protection, they can actually offer a business advantage that allows companies to achieve success relating to an acquisition where it would otherwise not be possible. Such is the case with Reps and Warranty (R&W) insurance. R&W insurance provides coverage against financial loss caused by breaches of the representations and warranties made in the M&A agreement. While every business does extensive due diligence to verify information provided by their deal partner before closing, the fact is that any complex transaction contains a certain number of unknown risks and unforeseeable circumstances. Often these unknowns do not reveal themselves until well after a deal has closed. R&W insurance is particularly useful to buyers in these circumstances.
Unfortunately, awareness and use of this type of insurance remains relatively low. Insurance carriers have estimated that less than 20 percent of M&A deals in the United States utilize R&W insurance. But its use is on the rise, and with good reason. In many cases, R&W insurance can help push a proposed deal across the finish line. So why don’t more companies take advantage of this tool? For one, because it is underused, there are a number of misperceptions in the marketplace about how it works and what it entails. Let’s try to debunk those myths. But first we must understand when using R&W insurance makes sense.
When Should I Consider R&W Insurance?
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