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10 Reasons to Incorporate Reps and Warranties Insurance Into Your Transactions

Thursday, June 8, 2023
Mike Richmond
Reps and Warranties Insurance

As the market for Reps & Warranties Insurance (RWI) continues to see increasingly competitive rates and terms, it makes more sense than ever to incorporate RWI into all your transactions.

Rates are dropping to lower than 2.5% of insured limits compared to historical averages of 4-6%. Retentions are also dropping to as low as .5% of enterprise value when they have historically been 1%. We are also seeing fewer exclusions, ease of obtaining non-binding indications letters (NBILs), more efficient underwriting and negotiable underwriting fees.

But Horton’s M&A Practice is still regularly asked, “Why should we buy Reps & Warranties Insurance?” Below are the Top 10 reasons to do so.

  1. Enhances Attractiveness of Your Offer

Competition for quality assets is an issue, particularly in this interest-rate environment. The ability to remove a seller’s escrow requirements can help you win the deal. The current lower rates and retentions also put buyers in a position of strength. Buyers can offer to take on the full cost and retention of policies for slightly more exposure than it used to be for splitting the cost and retention. This is a win-win for both parties.

  1. Offers Six Years of Coverage Instead of One or Two

Most purchase agreement indemnification periods only cover one to two years. Reps and warranties insurance provides six years of coverage for breaches of fundamental and tax reps and three years of coverage for general reps. It provides far more coverage for a longer period of time.

  1. Provides Expert Representation and Convenience in the Case of Claims

The last thing you need as an investor or operator is to spend time dealing with reps and warranties litigation. RWI provides the resources and counsel to manage this for you.

  1. Streamlines Payment Process

Just because a purchase agreement includes an escrow, it doesn’t mean the money is readily available. Some sort of process will need to take place, whether an investigation into the complaint or full-blown litigation. An RWI policy provides for a much more efficient process of payment.

  1. Less Confrontation with Sellers (and Their Attorneys) Pre-Close

When both parties know they are going into the Purchase Agreement negotiation, the details do not need to be as heavily negotiated. Also, if a No Seller Indemnity (NSI) arrangement is determined upfront, you eliminate much of the need for the back and forth. Most RWI underwriters are willing to provide NSI policies for only an incremental additional cost (~2-5% of the additional premium).

  1. Less Confrontation with Sellers Post-Close

This is especially important if the seller is rolling over significant equity and/or staying on as an operator. The last thing you want to do is be involved in costly litigation with the operator of your investment.

  1. Eliminates Concern of Seller Solvency

If the seller ceases to exist post-close, it may be difficult or, in some cases, impossible to track them down in an economically feasible manner. The RWI policy removes this concern completely.

  1. Protects the Seller

Often overlooked, but the seller receives protection in RWI policies as well. The RWI insurance company waives its right to subrogation against the seller unless there is seller fraud. This means that innocent misrepresentations by the seller will not lead to them paying out of pocket.

  1. Offers Additional Diligence Support (“Diligence the Diligence”)

RWI policies require extensive diligence in the most important areas of transactions. These areas can often be overlooked, not given the proper attention they deserve, or simply need another professional’s support to help assess the situation. RWI policies offer a framework for ensuring proper diligence is conducted. In the event of pushback from sellers, RWI coverage can be used as an excuse to ensure proper diligence is conducted.

  1. Facilitates Transactions

Reps and Warranties Insurance regularly helps ease concerns with negotiations and can often be the lynchpin to move a deal over the hump. Diligence is still necessary in all areas, including tax, QofE, legal, etc. But the peace of mind in having RWI coverage can remove obstacles in negotiation.

Ready to Purchase Reps & Warranties Insurance?

Reach out to Horton’s M&A team to learn more about Reps & Warranties Insurance and ensure that you are getting the best coverage.

Material posted on this website is for informational purposes only and does not constitute a legal opinion or medical advice. Contact your legal representative or medical professional for information specific to your legal or medical needs.