Reps & Warranties Insurances
Authors: Dr. Silvia Wandl; Dr. Matthias Trummer, MSc; Dr. Krzysztof Nowak, LL.M.; Mag. Katharina Seethaler, LL.M.
Reps & warranties insurances simplify, accelerate and increase the value of M&A transactions. These insurances are able to help resolving or softening conflicts of interest between buyers and sellers. To facilitate a smooth process of taking up a reps & warranties insurance coverage, the involvement of an insurance broker should take place as early as possible within the transaction stage.
What are reps & warranties insurances?
Reps & warranties insurances (also warranty & indemnity (W&I) insurance or M&A insurance) cover the risks that may arise from warranties or guarantees given in connection with M&A transactions.
Thereby, conflicts of interest between buyer and seller during the negotiations of the catalogue of contractual guarantees or warranties can be resolved. That is because reps & warranties insurances enable a comprehensive guarantee catalogue for the buyer on the one hand and a lower maximum liability amount for the seller on the other hand.
Policyholders can be both buyers and sellers, with the buyer’s police dominating the market.
What risks are insurable?
These insurances cover those risks, where a promise made by a seller turns out to be incorrect. The insurability of a risk follows the scope of the due diligence. Thus, only those issues that have been covered within the due diligence process are insurable. Therefore, a thorough due diligence is a prerequisite for insurance coverage.
Furthermore, the share or asset purchase agreement must include the insured warranties must as well. In practice, it is therefore essential that the policy is precisely tailored to the purchase agreement.
Reps & warranties insurances generally exclude the coverage for risks known, but not materialized yet. Such risks can be insured by so-called special situation insurances (e.g. for tax and environmental issues or in the form of a litigation buyout policy).
Future-related guarantees (such as the achievement of certain turnover or profits) are generally not insurable. The same applies to situations for which other insurance policies have already been taken out (such as product liability insurance). Construction defects, violations of economic sanctions imposed by the USA and the EU and other fines are usually also excluded.
How to get insurance coverage?
In order to obtain the most complete and cost-effective insurance cover possible, it is necessary to obtain respective offers from several insurers. As this is a very complex task, companies usually involve an insurance broker. The broker should be engaged as early as possible in the transaction stage to ensure that there is still enough time to negotiate the insurance agreement and the premium to be paid.
In a first step, the insurance broker obtains the first indicative offers from several insurers. An information memorandum, management presentation and financial data of the target are usually all that is required for that step. The broker then analyses these offers with regard to costs, coverage and other factors. He prepares his results in a so-called NBI (non-binding indications) report representing the broker’s initial assessment of the insurability of the guarantee catalogue and the premium.
Based on the NBI Report, the client selects an insurer for the further risk assessment, the so-called underwriting. To carry out the risk assessment it is necessary to submit further documents, such as the due diligence reports or to grant the insurer access to the data room (depending, among other things, on the scope of the insurance coverage).
The insurance agreement is usually concluded in course of the notary’s appointment to sign the share or asset purchase agreement. However, the signing of the insurance agreement can also be foreseen as a closing condition.
The insurance broker accompanies the policyholder throughout the entire risk assessment process and works closely with his lawyers and advisors. The aim for the final policy is to reflect or even extend the liability concept of the share or asset purchase agreement. Under no circumstances, should there be any gaps in the coverage for the case that the purchase agreement releases the seller from liability.
PwC Legal Austria has extensive experience in working with insurance brokers and we are happy to support you in the selection of the most suitable insurer for your M&A transaction.
