Key Considerations For Representation And Warranty Insurance

The allocation of risk through representations and warranties and the accompanying indemnification obligations is a primary source of contention in almost every private merger and acquisition transaction. Buyers aim to negotiate an expansive indemnification package as a means to cover the majority of post-closing losses (and may seek an escrow to facilitate recovery). Whereas sellers seek to limit their post-closing indemnification exposure by narrowing the scope of the representations and warranties, negotiating for short survival periods and inserting indemnity deductibles, caps and other limitations.

Representation and warranty insurance helps resolve this conflict by, in exchange for insurance premiums, shifting a majority of the risk from the transacting parties to a third-party insurance provider.