M&A & exit
Representations & warranties (R&W) insurance
Insurance policy covering losses from breaches of the seller's representations and warranties in an M&A transaction.
Definition
Representations & Warranties (R&W) insurance is a specialized insurance policy that covers losses arising from breaches of the seller's representations and warranties in an M&A transaction. The insurer assumes the indemnification risk that would otherwise be borne by the seller, allowing for 'no recourse' or 'limited recourse' deal structures. R&W insurance has become standard in mid-market and larger Canadian M&A deals since 2018.
Same concept, different references
| Canada | R&W insurance, governed by insurance contract |
|---|---|
| Quebec | Assurance R&W, regulated by AMF |
| US | Most-developed R&W market, governed by state insurance law |
| UK | W&I insurance (warranty and indemnity insurance) |
How R&W insurance works
An R&W policy operates as a contract between the buyer (usually the policyholder) and the insurer:
- Coverage: the policy covers losses from breaches of identified categories of reps and warranties in the SPA
- Policy limit: typically 10-30% of purchase price
- Retention (deductible): typically 1% of purchase price, sometimes split between the buyer and a small seller-side escrow
- Exclusions: known issues (disclosed in diligence), specific high-risk areas (sometimes carved out separately), criminal liability, certain tax matters
- Premium: 2-4% of policy limit, paid as a one-time amount at policy inception
Buy-side vs sell-side policies
Two main R&W policy types, with buy-side dominating modern practice:
- Buy-side policy: buyer is the policyholder; insurer pays buyer for indemnity losses. Buyer can pursue the seller for the retention, then pursues the insurer for amounts above the retention. Standard in modern Canadian M&A.
- Sell-side policy: seller is the policyholder; insurer pays seller's indemnification obligations to buyer. Less common today but used in some specialized contexts (auction processes, family-business sales).
- Stapled policies: insurer commitment is 'stapled' to the M&A process; binding insurance is available concurrent with the SPA signing.
Why R&W insurance is now standard
Several factors drove the explosion of R&W insurance use since 2018:
- Cleaner exits for sellers: family-business sellers, private equity sellers, and individual sellers can exit with most of the proceeds in hand at closing, with less or no escrow
- Faster deals: insurer underwriting often runs concurrent with diligence, not afterward. Closing can happen quickly.
- Competitive advantage: buyers offering 'no recourse' or 'minimal recourse' bids are more competitive in auction processes
- Insurance market expansion: more insurers entering the market drives down premium rates and broadens coverage availability
In Octelligence
Clean records make R&W underwriting faster.
Insurers underwrite R&W policies based on the quality of the diligence process. Sellers with clean Octelligence records have faster underwriting, broader coverage, and better pricing.
View digital corporate recordsM&A and exit
Make M&A diligence faster with clean records.
SPAs convert from LOI faster, escrow holdbacks shrink, R&W insurance underwrites tighter. Octelligence keeps records audit-ready.