Meaning
An insurance policy used in corporate transactions to cover the risk of financial losses resulting from a breach of the representations and warranties made by the seller in the acquisition agreement. By transferring this risk to a third party insurer, rep and warranty insurance facilitates a smoother transaction. This policy can be purchased by either the buyer or the seller.
Buyer Policy
The buyer’s policy is the most common form, allowing the purchaser to claim directly against the insurer for losses caused by breach of warranties. This arrangement reduces the need for the seller to place a large portion of the purchase price in escrow. It protects the business relationship between the buyer and the seller.
Seller Indemnity
The seller’s policy covers the seller’s liability for unintended breaches. This coverage provides a clean break for the sellers.
Underwriting Review
The insurer conducts a detailed review of the transaction and the due diligence reports before issuing the policy. This underwriting process takes several weeks and requires the payment of a premium and a deductible. Once issued, the policy provides a clear limit of liability and a specified coverage period, which typically runs for several years after the closing of the deal.
