REPRESENTATIONS & WARRANTIES INSURANCEfor Private Equity Transactions

Ironwood Insurance Private Equity Practice

Ironwood’s experienced team of merger and acquisition (M&A) risk advisors helps optimize the outcome of your transaction with a properly structured representations and warranties (R&W) insurance policy. Our experienced underwriting, legal, tax and accounting resources enable us to provide highly customized coverage at competitive pricing.

Representations & Warranties InsuranceIn most M&A transactions, the seller makes contractual representations and warranties to the buyer regarding key facts about the seller’s business. To protect against losses arising from breaches of such representations and warranties in an M&A agreement, Ironwood advises companies on how to structure R&W insurance for each specific transaction. This coverage can be structured to protects parties on either side of a sale and helps reduce common M&A risks such as:

■■ Fundamental representations relating to ownership of equity and assets

■■ Inaccuracies in the financial statements, such as overstatements of accounts receivable or inventory

■■ Inaccurate tax returns and unpaid taxes

■■ Issues with ownership or infringement of intellectual property, employee benefits and compensation, and compliance with laws and regulations

A seller-based policy will cover a seller for defense costs and losses resulting from claims made by the buyer for inaccuracies in the R&W. A buyer-based policy will enable a buyer to recover losses (including defense costs) from the insurer without having to locate and pursue the seller and its assets.

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Product Terms and Underwriting Focus Depending on the insurer, high limits are commonly available with a maximum policy limit of $25 million being offered by a number of markets. Premiums and deductibles vary according to the size and risk of the corresponding transaction, and the policy term is usually up to six years. Coverage is available for most industries except insurance companies, banks and other financial institutions. High-risk exposures — such as environmental liability for heavy manufacturing, government payer billing compliance for healthcare, and product liability exposure for pharmaceuticals — may be subject to exclusions.

Urgency and Required DocumentsIronwood understands that a sense of urgency is critical to the success of every transaction. We work closely with specialty insurers to stream-line the underwriting process and quickly facilitate your transaction. We negotiate on your behalf with preferred underwriters to obtain non-binding indications on a rush basis, generally within two business days after the required documentation is provided to us. Indication letters will specify proposed policy terms and conditions (subject to satisfactory underwriting review), and identify additional steps required to finalize the underwriting process.

In most cases, we can bind coverage within one to two weeks after the initial submission, although our team has also successfully worked with underwriters and clients to we can move even faster when the deal requires.

To help speed the underwriting process, Ironwood’s M&A team helps clients compile organize and compile the following documents, which are required as part of the submission package to underwriters:

■■ Names of potential insured, target and acquiring company

■■ Requested policy limit

■■ Acquisition agreement (current draft)

■■ Expected closing date and purchase price

■■ Most recent audited financial statements of target

■■ An offering memorandum, if available

■■ If a heightened risk has been identified, a brief explanation of the risk

■■ Nondisclosure agreements can be requested from insurer to protect confidential information

Additional Services for Private Equity Practice Clients■■ Private Equity Surety Bond Program

■■ Private Equity Environmental Insurance

Key advantages of R&W Insurance for Buyers and Sellers

Enhanced bargaining positionStreamlines negotiations and allows a buyer to enhance its bid by reducing the indemnity ceiling and escrow

Mitigate surprisesBuyer-side policy: assures the value of acquired businesses will not be reduced by unexpected liabilities, and may also cover loss resulting from seller fraud

Seller-side policy: enables the insured to walk away from the closing confident that the proceeds receives in the transaction will not be diminished by subsequent legal claims

Enhanced return on investmentEnables a seller to distribute the proceeds of a transaction without putting up internal reserves, thus enhancing its ROI

Smooth risk transferFills due diligence gaps by indemnifying the seller or providing first-party coverage for the buyer

Facilitate financing or support subsequent resaleBuyer-side policy: can be assigned to a lender or subsequent purchaser, enhancing the value of the acquired assets by facilitating asset-based financing or eliminating concerns of a potential buyer

Deal facilitationFacilitates transactions by eliminating risks that neither party is willing to assume