REPRESENTATION AND WARRANTY INSURANCE

With the uncertain economic climate, the pent-up demand for high-quality companies, as well as ever-looming tax increases, merger and acquisition deal structures are perhaps a little different from what has occurred in the past. One of those changes is the use of representation and warranty insurance, rather than placing sale proceeds in an escrow account for a certain period of time. The buyer of a company can recover under the insurance policy if there is a breach of a representation or warranty. Such policies have been around for 10 years or so and are more readily available, as more underwriters are offering this product. It quantifies the seller’s exposure and allows him or her to walk away with the sale proceeds (minus the premium for the insurance).