The ROI on Reps & Warranties
Transactional liability insurance is a valuable tool for the facilitation of mergers and acquisitions. One type of transactional liability insurance is representations and warranties insurance (RWI), which is used in the event of a breach in the M&A transaction agreement. Here, we speak with Lessman to discuss the growing popularity of the RWI market and trends to watch.
Strong due diligence has become more important than ever. This covers a significant number of areas. From an insurance standpoint, diligence parameters in almost every deal should encompass general corporate issues, such as capitalization and authority, financial and accounting affairs, tax matters and employment and employee benefits. Additional parameters vary by the industry of the target company. Regulatory issues may take center stage for financial services companies, while product liability and environmental issues could play a more important role for manufacturers. The importance of cyber security and privacy issues can also vary by industry.
It is also important to understand that some parts of the R&W may not be covered. Standard exclusions to coverage include matters such as covenant breaches, forward-looking statements, and purchase price adjustments. If an exclusion exists, buyers and sellers will need to agree on who is liable for the uncovered representation or warranty. Due to the potential complexity of exclusions, buyers and sellers should choose a carrier with a reputation for transparency at every step of the process.
We’re confident transactional liability insurance will continue to be a product in high demand, considering the benefits to both buyers and sellers, such as streamlining M&A negotiations and enhancing deal outcomes. The market has come a long way, and there is still room for growth not only in higher deal volume but also broader acceptance by a greater range of industries as companies become even more familiar with the coverage.
The due diligence process will likely get easier as M&A participants continue to better grasp the diligence needs during the process. The ease of doing business should also improve as technology advances and data becomes more accessible to support a better understanding of risk, but carriers will need to balance the use of technology with a personal touch.