In recent years, representation and warranty insurance (RWI) has become increasingly common in M&A transactions. Which of the following best describes the primary benefit of RWI to the buyer?
- AIt eliminates the need for any representations and warranties in the acquisition agreement
- BInsurer backs indemnity claims, reducing reliance on seller credit✓ Correct answer
- CIt guarantees the target company's future financial performance
- DIt replaces the need for due diligence and fairness opinions
Why B — Insurer backs indemnity claims, reducing reliance on seller credit
RWI shifts the risk of breaches of representations and warranties from the seller to an insurance carrier, providing the buyer with a creditworthy third party to satisfy indemnification claims. This is particularly valuable when the seller is a PE fund that wants a clean exit without holdback or escrow obligations, or when there are multiple sellers who may be difficult to pursue for indemnification claims. RWI does not eliminate the need for representations, warranties, or thorough due diligence, as the insurer relies on these as part of its underwriting process.
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