Representation & Warranties
Representation & Warranty Insurance, also known as “transitional risk” coverage, protects companies against the growing risk of costly litigation after a merger or acquisition. Mergers and acquisitions are rising; however, so is post-acquisition litigation. Cannabis companies involved in this venture face a multitude of backlash if the deal goes awry.
Who is R&W Insurance for?
Mergers and acquisitions (M&As) are on the rise. Each year, more and more companies join forces to form healthier and more sustainable organizations. Although this business strategy is desirable and successful, it also comes with a hefty amount of risk. Consider what would happen if a seller’s representation were inaccurate, causing a buyer financial loss. Or if the buyer filed a lawsuit against the seller, alleging a breach in the terms of agreement.
Representations and warranties (R&W) insurance benefits buyers and sellers, protecting both parties from costly litigation by providing capital for legal fees and settlements. Additionally, this policy serves as an excellent negotiating tool, often ensuring more lenient indemnification terms or removing them entirely.
An R&W policy can make buyers’ bids seem more attractive, extend the time for the duration, enhance the amount of protection, and improve the buyer’s likelihood of winning a case under this coverage.
R&W insurance can improve the condition of the deal, provide a cleaner exit, reduce or eliminate the traditional seller’s indemnity for breach of contract, and offer more extensive coverage without many qualifiers.
Using an R&W insurance policy helps to simplify and speed up negotiation of the acquisition agreement. Plus, it offers more coverage than traditional acquisition agreements offer.
Why you need R&W Insurance?
Safeguards the purchase or sale of a company
Transfers M&A fears and risks from your company to the insurer
Covers the indemnification of specific breaches
What does R&W Insurance cover?
Representations and warranties (R&W) insurance benefits buyers and sellers, protecting both parties from costly litigation by providing capital for legal fees and settlements.
Breaches of Purchase Agreement
R&W insurance is generally meant to cover breaches of all general and fundamental representations and warranties within a purchase agreement.
Pre-Closing Tax Indemnities
Pre-closing tax indemnities are generally covered but only to the extent that the seller’s financials are incorrectly calculated.
A typical buy-side policy does provide the buyer with the benefit of coverage for seller fraud.
R&W Insurance Considerations
R&W Insurance Considerations
R&W Insurance Claim Examples?
If a buyer discovers that a sellers’ representations were inaccurate, and the buyer suffers a financial loss, a massive lawsuit typically ensues.
Post-acquisition companies typically have many more employment practice risks to navigate, and with so many changes, employees could quickly become offended by new leadership actions. In the current legal landscape, we recommend this labor law coverage as standard coverage for companies with any number of employees. Especially when onboarding new employees to a company they did not initially sign on to work for.
Unsurprisingly, many executives understand the necessary insurance coverages for a successful merger or acquisition. However, these coverages often drop off once the parent company takes over and creates a significant exposure if a lawsuit arises for actions of the acquired before merging.