Representation And Warranty Insurance: When Is It Worth It?

Introduction

Who bears the cost when a deal goes sideways? Risk allocation between buyer and seller in regards to financial and operational liabilities for the period preceding a closing, sits at the heart of that answer. While parties can rely on a range of tools to structure and manage risk, representation and warranty insurance (“RWI”) has been increasingly used within Canadian M&A transactions, protecting the parties against financial losses arising from a breach of representations and warranties of the seller. This article explores when RWI is an effective tool that enhances deal outcomes, and when traditional risk allocation mechanisms remain preferable.

What is RWI?

RWI is an insurance product, used in mergers and acquisitions, that protects a party from financial losses caused by breaches of another party’s representations and warranties in a purchase agreement, such as undisclosed liabilities or tax exposure.