Mergers and acquisitions insurance, R&W Insurance

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Insurance to cover the risks resulting from sale and purchase of companies, known as M&A insurance or W&I Insurance, are not usual in practice, but there is a tendency that shows a significant increase during the next years.

M&A insurances covers, in particular, the representations and warranties (known as R&W) and sometimes the indemnifications too. R&W consists of statements referring to the company in respect of which they are issued. About this concept it can be visited previous entries of this blog, such as: “Manifestaciones y garantías en las compraventas de empresa, instroducción” o “Tipos de manifestaciones y garantías en las compraventas de empresa”.

The scope of the M&A insurance can vary greatly from one insurance to another, depending on each case, but its scope in general is the fulfillment of the R&W stated by the seller, with the limit of the price paid by the purchaser or the enterprise value of the target company. However, it is also common that, in case of willful intent by the seller, neither the limitation on the R&W nor the M&A insurance applies.

M&A insurances require high premiums, so for those who are not used to this type of insurance it can require higher expenses than the expected. However, considering the amount of insured risks and the probability of its materialization, at least part of the risks covered, its cost is not as high as it might initially seem. However, the insurance cost can vary greatly depending on the R&W drafted. In this sense, it should be considered that the insurer determines the price based on the total amount guaranteed, after analyzing the transaction, the documents formalizing such transaction and, most notably, the R&W of the sale and purchase agreement (SPA).

The use of M&A insurances is especially useful for providing security and, in case of entities executing M&A transactions regularly (such as venture capital and private equity entities), as an instrument to avoid post-closing conflicts and trials with the purchaser. Apparently, this trend in favor of M&A insurances arises both from the development in M&A and, in particular, from the increase in global uncertainty. Another variable affecting this kind of insurances may be the increase in the amount of capital and information available, together with low interest rates.

The costs of an M&A insurance can be borne by both the seller and the purchaser, or both parties. Furthermore, the policy holder can be the seller or the purchaser regardless of who pays the insurance premium. 

Sometimes the use of an M&A insurance can make the difference between closing the transaction or not, so the price of these instruments may be worth it precisely because it is the instrument that finally allows a successful deal.

Despite the aforementioned benefits, both in aspects such as obtaining security, and facilitating the conclusion of the agreement, the relevant costs and excess of M&A insurances, make necessary to analyze in detail its pertinence, as well as what risks are covered and how the R&W are drafted.