Transaction liability insurance: Small deals guide
Transaction liability insurance is a valuable tool to help buyers and sellers facilitate mergers and acquisitions (M&A).
The most common form of transaction liability insurance is known as representations and warranties insurance (R&W) in North America, and warranty and indemnity insurance (W&I) internationally. Other forms of transaction liability insurance include tax liability insurance and contingent liability insurance.
R&W insurance is increasingly common in M&A transactions, but may not be appropriate for micro and SME deals (generally below USD 10m). CFC has recently launched a groundbreaking new product: Transaction liability private enterprise (TLPE), aimed at these smaller deals.
In this guide you'll learn:
Why insure a deal?
Under the terms of a typical M&A deal, sellers carry the risk for any liabilities which occurred while they owned the company. If these issues are discovered after the transaction completes and cause financial loss, the seller is often financially responsible.
What are representations, warranties and indemnities?
Representations and warranties are statements of fact. In an M&A transaction, the seller will represent and warrant certain facts about the company which they are selling.
What happens when a representation or warranty is breached?
When a representation or warranty is proven to be untrue, or breached, the seller will be liable for any losses suffered by the buyer as a result, which sometimes includes the diminished value of the acquired business.
How does a policy work and who should buy M&A insurance?
In the absence of an R&W insurance policy, buyers have two options to protect themselves against financial loss as a result of inaccurate representations and warranties. The sellers could either deposit money into a ringfenced escrow fund, or the seller would be liable to pay them up to a certain portion of their sale proceeds, or a combination of both.