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Representation and warranty (R&W) insurance covers the risk of a target company’s seller breaching representations and warranties in the securities purchase agreement. (Photo: Shutterstock)

Private equity firms and companies use transaction liability insurance to manage the risk inherent in mergers and acquisitions. Representation and warranty (R&W) insurance is a type of transaction liability insurance that covers the risk of a target company’s seller breaching representations and warranties in the applicable securities purchase agreement. R&W insurance was first created decades ago but has become increasingly popular in the past few years, particularly among private equity firms, which use it to facilitate the purchase and sale of portfolio companies.

Most often it is the deal team members and outside or in-house lawyers working on the transaction who purchase an R&W policy. But, given the increasing popularity of these policies, risk managers also should equip themselves to advise their organization concerning their purchase and to facilitate payment of any claims that arise. This article covers five aspects of R&W insurance that every risk manager should know.

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