Meaning
Financial exposure of parties in a corporate acquisition resulting from breaches of representations, warranties or tax covenants. Transactional liability is a central focus of the negotiation process during the sale of a business.
Insurance Placement
Buyers and sellers often purchase specialized policies to transfer this risk to a third party insurer. This approach allows the seller to distribute the proceeds of the sale immediately rather than holding funds in an escrow account. The policy covers the losses that would otherwise be claimed under the indemnity provisions of the purchase agreement.
Premiums for this insurance are typically calculated as a percentage of the total coverage limit and are paid at the closing of the deal. In large transactions, the use of this insurance facilitates a cleaner exit for private equity funds that need to return capital to investors.
Warranty Coverage
Protection usually extends to fundamental representations such as the ownership of shares and the legal authority to sell the company. Specific tax or environmental risks are often carved out into separate insurance endorsements.
Indemnity Limit
Agreements define the maximum amount that a buyer can claim and the minimum threshold that a loss must exceed before a claim is valid. These limits define the boundary of the financial risk for both parties.
