As buyers seek acquisition opportunities worldwide, they often encounter sellers resistant to accepting meaningful (if any) liabilities for potential pre-closing exposures, causing buyers to look to the insurance market for protection. Depending on the jurisdiction, such insurance may come as representations and warranties (R&W) or warranty and indemnity (W&I) insurance. Although they serve the same basic purpose — coverage for unknown historical issues — their pricing, underwriting process, and scope of coverage are markedly different. Such differences mirror cultural differences between the United States and Europe in how buyers and sellers allocate risks in M&A transactions, and how insurance has developed to solve jurisdiction-specific issues. Generally speaking, the US is more buyer-friendly and policyholder-friendly, while “buyer beware” is the norm in Europe.
Here we compare key differences in relevant M&A backgrounds and insurance terms. While this summary shows basic frameworks, brokers commonly negotiate enhancements, allowing buyers to choose from a menu of options, but also requiring assessment of how they interact with one another and their pricing impact. In addition, each transaction is unique and local practices and insurance markets (e.g., the UK, Germany, France) can vary. In fact, as more insurers expand geographically to serve cross-border buyers, the choice between R&W and W&I insurance is becoming less binary, and buyers increasingly have the option to create a blended option.
A. Differences in Economic Terms
| Europe (W&I) | United States (R&W) | |
|
Premium |
0.60% to 1.50% |
2.20% to 3.50% |
|
Policy retention |
0.25% to 0.50% (often tipping to nil and nil for fundamental warranties) |
0.50% to 1.00% (retention will typically drop to 0.50% or lower after 12 months) Tipping retentions are not offered, but nil retention for fundamental reps may be negotiable. |
|
Standard duration |
General: 2 years Fundamental/tax2: 7 years |
General: 3 years Fundamental/tax: 6 years |
B. Differences in Underwriting Process
|
Europe |
United States |
|
|
Underwriting process: written vs. spoken |
W&I underwriting process is iterative, relies more on written Q&A, and typically takes 1-2 weeks. The underwriter provides multiple tranches of questionnaires, consisting of general background questions and more detailed questions after the underwriter’s review of due diligence reports. The buyer and advisers provide written responses. An underwriting call is used as needed to work through any remaining issues. |
R&W underwriting process is more truncated, does not use formal written questionnaires, and can be compressed to about a week. The buyer and advisers participate in an underwriting call within a few days of the underwriter’s receipt of diligence reports and Disclosure Schedules. If there are any follow-up questions, such questions are typically answered via email. |
|
Seller involvement |
In European transactions, sellers running a competitive sale process will often commission third-party diligence reports for prospective buyers, with the expectation that the buyer’s advisers will then need to carry out only limited top-up due diligence. W&I underwriting process is often initiated by the seller, particularly in a competitive sale process. The seller may engage a broker to obtain insurance quotes and prepare a report on these that the seller can provide to prospective buyer(s) (a “soft staple”). Alternatively, the seller may decide to go further and work with a broker to select an insurer and prepare a suitable policy for the buyer (a “hard staple”). The latter is usually seen only in an auction sale process on a short timeline. |
In US transactions, sell-side diligence reports are rare. Buyers’ advisers (and/or in-house subject matter experts) typically carry out full-scope due diligence. Buyers typically run the entire R&W underwriting process (starting with broker engagement) without any direct interaction between the seller and the broker/the insurer. |
[1] These rates are for M&A transactions, and real estate and other transactions are priced differently. Insurance pricing changes over time and is currently at historically low levels concentrating in the lower half of the range for the US. Indicative premium ranges will vary depending on the type of business or transaction, locations of the business, the governing law of the transaction agreement, and the domicile of the policyholder, among others.
[2] The definition of “fundamental” representations and warranties is narrower in Europe than the US. All operational representations and warranties are typically considered “general” in both jurisdictions.
|
Europe |
United States |
|
|
Disclosure and level of knowledge |
In European transaction agreements, it is customary for (i) documents in the data room and (ii) certain public databases to be “generally disclosed” against the warranties.3 While such general disclosure does not preclude the seller from also making specific disclosures in the Disclosure Letter, it does create more risk for the buyer by bringing in a much wider set of matters that could prevent the buyer from making a warranty claim. W&I policies generally follow the above European approach on general disclosure. In addition, they typically deem the contents of buy-side diligence reports disclosed. |
In US transaction agreements, the data room is used merely as an information repository, and the seller must make specific disclosures in the Disclosure Schedules to carve out such matters from the scope of the representations. R&W policies generally follow this US approach. The data room and diligence reports are not deemed disclosed, and the onus is on the underwriter to add any exclusions based on issues identified during the buyer’s diligence. |
|
Deemed modifications to representations and warranties |
In European transaction agreements, warranties are typically drafted as relatively short sentences on specific matters of different areas of the business. In France, in a competitive sale process, the transaction agreement generally contains limited warranties (with sometimes only fundamental warranties) at the auction phase. W&I policies often contain a stand-alone “warranty spreadsheet” explicitly identifying cover position for each warranty (cover, partial cover, exclude) and any deemed modifications. |
In US transactions, representations cover similar categories of topics as European transactions such as capitalization, financial statements, IP, and employee matters, but each category is fleshed out in more detailed paragraphs. R&W policies do not contain a warranty spreadsheet, and representations are covered unless otherwise specified. Deemed modifications to the representations or Disclosure Schedules are proposed on a limited basis. |
|
Synthetic representations and warranties4 |
Depending on the circumstances, W&I insurers are willing to provide synthetic warranties for the purposes of the policy where the seller is unwilling or unable to make the warranties in question in the transaction agreement. Currently, certain insurers offer entire warranty suites on a synthetic basis in some markets. Data room and buyer diligence reports will remain disclosed against those warranties. |
Typically, R&W insurers are unwilling to offer synthetic representations. |
|
Loss |
European jurisdictions vary in their approach to what constitutes loss and how that loss is calculated for the purposes of a buyer claim for damages. In the UK, the transaction agreement will not necessarily define loss but will generally exclude certain types of loss such as loss of profit and indirect consequential loss. The measure of damages for the relevant loss will be on a contractual basis, which typically involves calculating the diminution in value of the shares acquired. In France, the transaction agreement usually contains a definition of loss that includes direct, foreseeable and actual loss but excludes lost opportunities and loss of reputation. The loss for which the buyer may claim is calculated on an indemnity basis but the agreement will generally disapply any multiple that the buyer used to determine the purchase price. In Germany, it is common for the transaction agreement to contain a contractual definition of loss, which would typically include (i) direct losses; (ii) foreseeable indirect and consequential losses; and (iii) loss of profit. Damages are typically awarded on the basis of the diminution in value of the shares acquired (with any damages based on multiples being generally excluded). W&I policies generally allow the buyer to recover the amount which it is entitled to claim under the transaction agreement (disregarding any contractual caps). |
In US transactions, the definition of losses is often broad. If R&W insurance is used, such definition typically does not exclude (and is silent on) multiplied, consequential, and similar damages, and is intended to make the buyer whole for losses suffered as a result of a breach. If the transaction is structured as a walkaway deal, the seller does not provide any indemnity and the transaction agreement does not contain any definition of losses. In R&W policies, the definition of losses is similarly broad. As long as the transaction agreement is silent as to the availability of multiplied damages, consequential damages, diminution in value, and lost profits, R&W policies will not exclude those amounts. |
|
Exclusions |
W&I insurers tend to have less appetite and more stringent diligence requirements than R&W insurers, which tends to result in a greater number and broader scope of deal-specific exclusions. W&I policies may contain the following exclusions that are not standard in R&W policies5: structural defects, condition or sufficiency of assets, specific labor law matters (holiday pay), cyber risks, product liability and recall, bribery (in high-risk jurisdictions), and certain financial reserves. |
|
|
Materiality scrape/ de minimis |
European transactions generally apply a small claims de minimis; therefore, warranties are not usually materiality qualified, except where needed to manage disclosure burden. Instead, the de minimis applies to all buyer claims against the seller. W&I policies also include a de minimis, which is independent from the de minimis amount agreed upon by the parties and will be determined by the materiality threshold(s) applied in buy-side due diligence. Insurers may be willing to scrape materiality qualifiers in warranties and rely solely on the de minimis. |
In US transaction agreements, materiality qualifiers are more widely used in representations, but it is customary for the seller to “scrape” such qualifiers for purposes of determining (i) whether a breach has occurred and/or (ii) the amount of losses, typically for both when R&W insurance is used. It is uncommon to have a claims de minimis, especially if R&W insurance is used. R&W policies routinely follow the materiality scrape contained in the transaction agreement and, in deals with no seller indemnity, provide a similar synthetic materiality scrape in the policy (provided the insurer is comfortable with the seller’s disclosure practices and approach to information sharing). R&W policies generally do not have a de minimis, so every claim or loss erodes the retention. |
|
Knowledge scrape |
In European transactions, the inclusion of knowledge qualifiers is common for certain warranties (e.g., no circumstances existing that may lead to a claim against the company). In a competitive sale process, the sellers will often seek to knowledge qualify the entire suite of business warranties. W&I insurers are typically willing to neutralize excessive usage of knowledge qualifiers by sellers by scraping such qualifiers for warranties that should be flat. |
In US transactions, knowledge qualifiers are typically used on a limited basis for matters beyond management’s reasonable knowledge or negotiated as a matter of risk allocation between buyers and sellers. R&W policies generally do not scrape knowledge qualifiers. |
[3] Whether information is “generally disclosed” requires a complex analysis, including an evaluation of whether the information was “fairly disclosed” as defined in the transaction agreement.
[4] Synthetic representations and warranties mean going beyond the representations and warranties in the transaction agreement and involve the policyholder and the insurer negotiating the wording of representations and warranties to be covered.
[5] Both W&I and RWI policies typically contain standard exclusions such as breaches known to the buyer’s deal team; purchase price adjustments; injunctive, equitable or other nonmonetary relief; asbestos or polychlorinated biphenyls; pension underfunding; uninsurable fines and penalties; transfer pricing; and loss of tax assets or relief (net operating losses).
In cross-border deals in which the buyer and the seller are accustomed to different M&A and insurance styles, depending on the competitive dynamic and relative bargaining power, the transaction agreement may follow the tradition of either party’s jurisdiction or adopt a unique hybrid approach. At the same time, as more insurers operate in multiple jurisdictions, the insurance market is better able to provide a bespoke solution, to a degree. To find an insurance solution that best fits the needs of a particular transaction, key steps include:
- Discussing specific attributes of the transaction, jurisdictions of the parties, and the buyer’s objectives with broker and counsel to determine if insurance coverage would be W&I, R&W, or a hybrid.
- Obtaining quotes and negotiating with an appropriate pool of insurers licensed in the relevant jurisdictions, depending on their appetite, expertise, and underwriting approach.
- Anticipating issues that would arise from cultural differences and proactively managing the underwriting process with the buyer’s advisers for optimal outcome.
At Goodwin and HWF Partners, we leverage a global team based in the United States and across Europe that capitalizes on valuable experience and expertise to navigate the complex issues that arise in cross-border transactional risk insurance placements.
|
Terminology |
Europe |
United States |
|
Statements of historical fact about the target |
Warranties6 |
Representations and warranties7 |
|
Transactional risk insurance |
Warranty and Indemnity Insurance |
Representations and warranties insurance |
|
Insurance deductible |
Excess |
Retention |
|
Consummation of the transaction |
Completion/Closing |
Closing |
|
List of explicit disclosures |
Disclosure letter (UK) or Disclosure schedules (EU) |
Disclosure schedules |
[6] Due to legal differences between the terms “warranties” and “representations” in certain European jurisdictions, it is uncommon for European sellers to make “representations” in transaction agreements.
[7] Commonly referred to as “representations” or “reps.”
|
Ai Tajima |
Michael Miranda |
About Goodwin
We are in the business of building authentic, long-term relationships with our clients, who are some of the world’s most successful and innovative investors, entrepreneurs and disruptors in the life sciences, private equity, real estate, technology and financial industries, and where they converge. Our immersive understanding of these industries – combined with our expertise across high-stakes litigation and dispute resolution, world-class regulatory compliance and advisory services, and complex transactions – sets us apart.
|
Peter de Boisblanc, Partner |
Phillipp Heer, Partner |
About HWF
HWF is a transactional risk insurance brokerage composed of senior brokers (each former M&A lawyers, transactional risk underwriters or similar professionals) who remain closely involved throughout the entire life of the placement to ensure flawless execution and exceptional responsiveness. With offices in New York, London, Dubai, Frankfurt, Munich, Paris and Warsaw, the team has a combined 200 years of experience in the transactional risk insurance marketplace and have advised on over 3,500 transactions and structured over 1,000 insurance placements.
Please note, HWF Partners US LLC is not an accounting, tax or legal adviser. Please refer any such matters to the appropriate advisor for their consideration and opinion. The information contained herein is of a generic nature and is not intended to be relied upon as specific advice. HWF Partners US LLC is a Delaware Limited Liability Company. In New Jersey, HWF Partners US LLC License #3002241258. HWF Partners US Insurance Agency LLC is the New York trading name of HWF Partners US LLC, a Delaware Limited Liability Company. In New York, HWF Partners US LLC License.
This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee a similar outcome.
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