Below are some top tips from our session Insuring the Deal & the Dealmakers: Top 10 Issues in Representations & Warranties Insurance in Tech Deals (and how RWI can protect the economics of your transaction).
#1: Why is Representations and Warranties Insurance (RWI) important? RWI helps protect the value of the transaction from inaccuracies in and breaches of the representations and warranties set forth in the acquisition agreement and pre-closing taxes, subject to exclusions.
#2: RWI is an expanding marketplace. RWI has become increasingly popular in recent years. Whereas large companies have been hesitant to have RWI in the past, it is now the industry norm for mid-market deals, with more and more carriers offering RWI as the demand for policies grows.
#3: What are the benefits of obtaining a RWI policy? RWI can limit the seller’s exposure and indemnification obligations significantly and make bids more attractive. Typically, the retention amount under a buyer-side RWI policy is only 1%, which is usually split 50/50 between buyer and seller or borne entirely by buyer (i.e., an NSI deal). Today it makes economic sense, as it has become more feasible to underwrite the deals.
#4: Do your “exclusions” due diligence. Exclusions are important to note and include: actual knowledge of a breach, breaches of covenants, tax assets, forward-looking statements, asbestos, underfunded or unfunded benefit plans and more. If you have many known exclusions, it might not make sense to have RWI, although you can work with counsel to structure indemnity.
#5: Consider involving your broker early for claims reporting. Reach out at the first sign of a breach. Engage your attorney and your broker. Provide as much information as possible upfront. Consider bringing in outside experts such as a CPA/accounting expert, a valuation/damages expert, and/or a tax/auditing expert.
#6: Know your policy terms and limits. Be aware of your exclusions (e.g., tax liabilities or other carve-outs), reporting and mitigation obligations. Know your policy retention/deductible threshold when considering making a claim.
#7: Evaluate your claim before submitting. Evaluate the parties’ rights and obligations under the RWI policy, investigate important fact issues, gather supporting documents pertinent to the claim, and identify applicable law and research accordingly.
#8: RWI is intended to complement other policies. RWI always sits in excess of responding, underlying insurance. General liability, cyber, D&O, E&O, P&L and other insurance policies work together with RWI and are designed to maximize your recovery with respect to your claim.
#9: There are alternatives to RWI. These include third-party escrows, buyer holdbacks, purchase price adjustments and other transactional liability insurance products.
#10: Director and Officer Insurance (D&O) There are three pillars of D&O protection: exculpation, indemnification, and insurance. Effective August 1, a recent amendment to Delaware law expanded exculpation to not only cover directors but officers as well. Other states may follow. There is a gap between exculpation and indemnification – make sure you know the difference.