October 24, 2019

R&W Insurance: Influence on Deal Terms

SRS/Acquiom recently issued its annual “Buy-Side R&W Insurance Deal Terms Study,” which address how the use of buy-side R&W insurance continues to influence deal terms.  Here’s an excerpt with some of the highlights:

– Terms that are more seller-favorable when RWI is present include the presence of non-reliance clauses (potentially because sellers typically remain liable for fraudulent breaches and want to minimize that exposure), a seller-favorable formulation of material adverse effect (to minimize the risk of not closing) and a decreased willingness to allow claims to offset future earnouts (to separate outgoing indemnification payments from incoming earnout payments).

– When Buy-Side RWI is present: buyers feel less compelled to push for a pro-sandbagging clause since RWI policies typically contain a knowledge exclusion; sellers are less likely to have an obligation to notify buyers of representation and warranty breaches prior to closing, potentially because RWI policies do not typically cover breaches known; and buyers are more likely to have an obligation to mitigate losses, likely because this mirrors a common insurance policy provision.

– When Buy-Side RWI is present, sellers’ indemnification obligations are overwhelmingly likely to be structured as true (non-tipping) deductibles instead of first-dollar (tipping) baskets, likely because using a non-tipping deductible structure is the simplest way to make the acquisition agreement mirror the “split” insurance retention that is often contemplated by Buy-Side RWI, where each party bears some responsibility for the insurance retention amount.

It appears that the overriding theme of deals with RWI continues to be buyers & sellers working collaboratively to shift deal risk from the parties to the insurer. That’s worked well so far, but some contend that it has worked too well – and has resulted in a massive shift of mispricing risk to insurers, which could result in a day of reckoning at some point in the near future.

John Jenkins