REPS CAPTIVE AND INSURANCE WARRANTIES
BY: BRANDON HORROCKS STERLING INSURANCE
Reps And Warranties Insurance:
A Primer
Lone type of insurance that’ s quickly growing in popularity is Reps and Warranties. While it’ s been available since the mid-1990s, its use has surged in recent years as people have slowly been discovering the tremendous value it provides. If you’ re a frequent dealmaker and have never really considered this type of insurance, this article is for you.
Reps and Warranties insurance provides coverage for breaches in representations or warranties made by a seller to a buyer in connection with the sale of a company, subsidiary, or basket of assets. The target deal size for this type of insurance is $ 25 million to $ 3 billion, although it is sometimes available for even smaller deals.
The policies can be developed in either buyer-side or seller-side configurations. On the buyer side— which accounts for the vast majority of policies sold in the United States— reps and warranties mainly serve as a strategic tool to protect the buyer and get deals done more quickly. Because the buyer is protected by this type of policy, he or she is able to offer more attractive deal terms, including a lower escrow and liability cap, shorter survival periods,
and low or no recourse against sellers. This type of policy allows for broader language in negotiating deal terms and helps provide the seller with a clean and timely exit. The buyer benefits by having peace of mind in knowing that an insurance carrier is standing behind any potential losses in the event of unsecured indemnity obligations by the seller.
On the seller side, the insurance can help minimize indemnification liabilities post-closing, ensuring a smooth exit and timely payouts to partners or other investors. The tax implications of a drawn-out indemnity period can also be avoided, thus simplifying and shortening the deal. If issues like succession are involved, a seller-side policy can also help the buyer avoid unexpected liabilities that could potentially jeopardize the deal.
Most Reps and Warranties policy forms are highly negotiable and are written with the cooperation of insurers, buyers, attorneys, and brokers. Despite the complexity of these policies, however, it is not necessary to seek out a national broker to accommodate most needs. Sterling Insurance has in-house capability to underwrite and vet policies using internal counsel and other on-staff talent.
Many insurance agencies have found themselves overwhelmed in writing these policies in recent years as demand for them has risen. Experience and overall proficiency in the claims area also varies widely among providers; some are just getting started in the field while others have been handling such claims for years.
If you haven’ t considered Reps and Warranties insurance in the past, now is a great time to jump in. Its great versatility can save you from a lot of headaches down the road and make your deals just that much safer. Sterling Insurance is well-equipped to help familiarize you with the“ ins and outs” of these policies, so feel free to reach out and contact us at 586-323-5700 at any time. +
Brandon Horrocks joined Sterling Insurance Group in 2013 and brought with him 20 years of knowledge and in experience in the Commercial & Benefits arenas. Brandon makes your business his business and is well versed in helping his clients reduce their risk & liability during the Merger & Acquisition process. Contact Brandon at bhorrocks @ sterlingagency. com or( 586) 685-0125.
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