What if your client were on the brink of a major deal—the kind that could change the trajectory of their business? Whether acquiring a company or selling their own, the stakes are high, and the risks are even higher. In moments like these, having the right protection in place is essential. Historically, you might have skimmed over representation and warranty (R&W) insurance, assuming it’s only relevant for massive deals with high premiums. But today, that’s no longer the case. With R&W insurance now available for smaller deals under $20 million, this powerful product is more accessible than ever, offering your clients protection they may not even realize they need.
What Is Representations and Warranties Insurance?
In any mergers and acquisitions (M&A) deal, sellers make a series of promises—called representations and warranties—about the company being sold. These promises range from the accuracy of financial statements to compliance with laws, taxes, and contracts. But what happens when these promises don’t hold up? Without the right protection in place, buyers could face unexpected financial losses, turning a great deal into a costly mistake.
That’s where R&W insurance comes in, which protects against financial losses due to a breach or inaccuracy in the seller’s representations and warranties. Common breaches include misrepresented financial statements, unpaid taxes, or undisclosed legal issues. And now, with R&W insurance being available for deals under $20 million, even your clients in smaller markets have access to this crucial protection.
R&W is Now Available for Small Deals Under $20M — Who Else Needs It?
R&W insurance was once reserved for large M&A deals involving hundreds of millions of dollars. However, this market has expanded greatly, which is good for your clients and good for your business. For large and middle-market deals valued in the tens or hundreds of millions, R&W insurance is table stakes. It typically involves a $100,000 minimum premium and an underwriting fee between $25,000 and $50,000. Underwriting requires a deep dive into the acquisition agreement and often involves extensive document production. More recently, new R&W products have been introduced to cover deals valued up to $20 million with more manageable premiums. This makes R&W insurance a viable option for many clients in smaller markets who might have previously overlooked this type of coverage. You can help your clients understand whether their deal size warrants R&W insurance and guide them in selecting the right coverage to protect their interests.
Key Components of Representations and Warranties Insurance Policies for Deals Under $20M
Representation and warranty insurance policies for small deals provide a tailored safety net for clients engaging in mergers and acquisitions, but it’s essential to understand what they cover — and what they don’t.
Policy Structure: Two Policies, One Product
R&W insurance for small deals is offered as a “product,” consisting of two separate policies issued simultaneously:
- The buyer-side policy covers the buyer for first-party losses arising from breaches of the seller’s representations and warranties, including known breaches of which the seller had knowledge.
- The seller-side policy protects the seller, typically covering their third-party liability for breaches. This policy often reduces or eliminates the need for large escrow accounts and excludes known breaches.
Together, these two policies offer both parties a comprehensive risk management solution, ensuring the transaction goes smoothly and without financial surprises.
What’s Covered
R&W insurance typically covers financial losses resulting from a breach of the seller’s representations and warranties made in the acquisition agreement, which can include:
- Inaccurate Financial Statements: If the seller misrepresents their financials (intentionally or not), the buyer is protected from the resulting liabilities.
- Legal Compliance Failures: Any misstatements about the company’s adherence to laws and regulations can lead to claims.
- Undisclosed Tax Obligations: If the seller fails to disclose outstanding tax liabilities, R&W insurance will cover the buyer’s losses.
- Material Contract Breaches: When the seller misrepresents their standing in key contracts, R&W insurance can cover the fallout.
Common Exclusions
While R&W insurance offers robust protection, it’s important to be aware of the exclusions. Clients should know what won’t be covered under these policies, including:
- Forward-Looking Statements: Projections about the future performance of the acquired company are typically not covered. R&W policies focus on past and present misrepresentations, not future business predictions.
- Known Breaches: If the buyer knows of a breach or issue before the deal closes and proceeds anyway, R&W insurance will not cover it. The policy is designed to protect against unforeseen risks, not known problems.
- Third-Party Claims: R&W insurance doesn’t usually cover claims brought by third parties not directly involved in the M&A transaction.
Why Is Representations and Warranties Insurance Important for Your Clients?
As R&W insurance becomes more accessible for smaller deals, your clients need to understand its value. Here’s why this coverage is essential, even for deals under $20 million:
1. Protecting Against Costly Claims
Your clients, especially those involved in acquisitions, are at risk of post-transaction surprises. Claims often arise when a seller’s representations are inaccurate, leading to financial losses for the buyer. Common sources of claims include issues with financial statements, undisclosed legal problems, tax errors, or contract breaches. R&W insurance covers these unexpected liabilities, providing peace of mind for both buyers and sellers.
2. Filling Gaps in D&O Coverage
Many clients mistakenly believe that Directors and Officers (D&O) insurance will cover misrepresentation claims. However, D&O policies typically exclude breach of contract claims, leaving a significant gap in coverage. R&W insurance fills this void, offering protection that D&O insurance simply doesn’t.
3. Streamlining the Deal with Reduced Escrow Requirements
Acquisitions often involve setting aside a portion of the purchase price in escrow, giving the buyer some financial protection if the seller’s representations turn out to be false. R&W insurance can reduce or even eliminate the need for escrow, allowing deals to close more quickly. This also gives sellers access to a larger portion of the sale price upfront, encouraging smoother transactions and better financial outcomes for all parties.
Now that representation and warranty insurance is available for smaller deals, it’s more important than ever to help your clients understand its value. By offering R&W insurance for transactions under $20 million, you’re providing them with an opportunity to mitigate risk and ensure their deals close without financial surprises. And with Jencap’s expertise and access to a wide range of specialty insurance products, we’re here to help you guide your clients through every step of the process.
Reach out to us today to learn how we can support your clients in their next M&A transaction — no matter the size.
