Representations and warranties insurance broker

What this seat actually does

Representations and warranties insurance transfers the risk that the seller’s promises in the purchase agreement turn out to be wrong, moving it from the seller to an insurer. Its practical effect is on the escrow: where a policy is in place, less of the purchase price needs to be held back, which matters enormously to a seller who wants their money and to a buyer who wants a clean recovery route.

The broker places the policy, but the more useful part of their work is early: telling you whether a deal of your size and shape is insurable at all, and what the insurer will require from diligence. Insurers underwrite off the buyer’s diligence, so a thin diligence scope becomes an uninsurable deal or a policy full of exclusions.

When you need one

Raised during letter of intent negotiation, not afterward, because whether a policy will be used changes the escrow and indemnity terms you are agreeing. Availability at the smaller end of the market is limited, so find out early rather than assuming.

How they charge

A one-off premium plus underwriting fees, with the premium expressed against the limit purchased. Who pays it is itself negotiable and is often split, so treat it as a term rather than a cost of doing business.

What to ask before you hire

• Is a deal of this size and in this sector insurable at all, and by whom?
• What will the insurer exclude, and which of those exclusions matter here?
• What diligence scope will the underwriters require, and does our current plan meet it?
• How does having a policy change the escrow and indemnity terms we should be asking for?

How to compare candidates

• Ask about exclusions before price. A cheap policy that excludes the risk you were worried about has bought you nothing.
• Ask how many claims they have actually seen paid, and what made the difference.
• Coordination with transaction counsel matters, because the policy and the agreement have to fit together.

The mistake owners make

Discovering the option after the letter of intent has fixed a large escrow. The insurance existed to make that escrow smaller, and the moment to use it has passed.

What this is not

Not commercial insurance, which covers the operating business. This covers the contract.

The Institute accepts no payment from any advisor, takes no fee tied to any transaction, and does not place or refer professionals for compensation. This entry describes a role, not a recommendation of any firm.