March 21, 2018

R&W Insurance: Deciding Whether to Pay Up or Roll the Dice

In today’s highly-competitive M&A market, private company buyers are sometimes faced with a choice – either pay the price for an R&W insurance policy, or live with no post-closing recourse for breaches of reps and warranties.

This Weil Gotshal blog lays out some of the factors that buyers should keep in mind in making this decision – and says that, despite the rapid growth in the use of R&W insurance, it might not always be the right choice for every buyer. Here’s an excerpt:

Repeat buyers such as private equity sponsors may question the value of obtaining R&W insurance in a particular transaction, particularly if they have done so frequently in past transactions but have not submitted (or received payment for) many claims. The initial outlay of premium and costs required to procure the insurance, coupled with the retention and potential exclusions may cause buyers (particularly those with large, diversified acquisition portfolios) to prefer to retain the risk of losses resulting from seller rep breaches by self-insuring.

An obvious risk of self-insuring is an unexpected, catastrophic loss that materially diminishes the value of the buyer’s investment – the type of loss that R&W insurance is essentially designed to cover. Ultimately, the question devolves into a commercial, risk-tolerance and cost-benefit-analysis that each buyer must perform on a case-by case basis.

John Jenkins