Typically, in a buy/sell transaction, the seller makes contractual representations and warranties 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 at a later date if there is a dispute regarding the accuracy of a representation or warranty.

A Representation and Warranties Liability Insurance policy covers the selling company and any designated owners, shareholders, directors, officers, and employees. The policy is triggered when a lawsuit or written demand is made by a buyer against a seller for a breach of a covered representation or warranty. Each policy is tailored for a specific business transaction and the insured representation and warranties will vary depending on the nature of the transaction.

Sometimes companies look to protect themselves from unanticipated liabilities by placing money in escrow. This protection alternative is much less cost efficient than purchasing insurance. The premium for a representation and warranties liability insurance policy is significantly less than the actual cost of an escrow account and does not tie up funds for several years, allowing for immediate release of proceeds.

Advantages:

• Shift contractual liability to insurer
• Provide immediate proceeds to seller
• Remove or reduce escrows or holdbacks
• Ease negotiating deadlocks
• Place financial security behind representation and warranties
• Simplify purchaser financing

The Coverage Highlights:

• $25 million limit of liability available from single insurer
• Right to choose counsel
• Minimum deductible, transaction specific
• Premium generally 2-8% of limit purchased, $75k minimum premium
• Aggregate retention (not each loss)
• Punitive damages covered where allowed by law.
• Worldwide coverage
• Policy period can match survival period of reps & warranties