In most buy/sell transactions, the seller makes contractual representations and warranties (R&W) that form the foundation for the transaction. Representations and warranties may relate to financial statements, accounts receivable, taxes, employee benefits, intellectual property, etc. The seller makes these representations and warranties in good faith in writing, and the buyer relies upon these statements to close the transaction. However, unanticipated liabilities may arise later if there is a dispute regarding the accuracy of a representation or warranty.

Advantages of an R&W Policy:

• Remove negotiating deadlocks
• Reduce escrows or holdbacks
• Financial security behind Representations & Warranties
• Facilitate purchaser financing
• Shift contractual liability to insurer
• Provide immediate proceeds to seller

The Process of Placing an R&W Policy:

• Gather initial underwriting material
• Draft/merger purchase agreement
• Financial statements of selling company
• Draft disclosure schedule (if available)
• Due diligence checklists and memoranda
• Market to determine carrier best suited to client need
• Indication from the carrier, usually 3-5 business days from receipt of documents
• Engagement requirements with specific carrier(s)
• Gather any additional information as required by the underwriters
• Finalize terms and conditions
• Bind coverage

The Coverage Highlights:

• Policy terms and conditions are transaction specific for buy side or sell side policies
• Generally, premium is 2-8% of limit of liability purchased depending on the risk assessment
• Aggregate retention (not each loss) 
• Policy period can match survival period of representations & warranties (generally, up to 6 years)