How R&W Insurance Is Shaping Today’s M&A Deal Terms

Nick Gourley
Attorney, Corporate

Abstract

Nick Gourley, a corporate attorney at Stoel Rives, outlines the growing role of representation and warranty (R&W) insurance in today’s mergers and acquisitions market. As buyers become more selective and sellers face valuation pressures, R&W insurance is gaining traction as a tool to reduce post-closing risk and facilitate cleaner exits for sellers.

Gourley explains that while this insurance product isn’t new, evolving market conditions and broader insurer participation—especially in smaller deals—are fueling its increased use. For both buyers and sellers, early discussion around R&W insurance can streamline negotiations, shift risk more predictably, and create more buyer-friendly terms without exposing sellers to greater liability. Gourley advises M&A participants, especially those less experienced with the process, to engage counsel early and consider this increasingly common tool in transaction planning.

Transcript

Hi, I'm Nick Gourley. I'm in Stoel’s corporate practice group. I focus on mergers and acquisitions, private securities offerings, and equity financings. So, particularly in the M&A space, I am seeing more and more deals come across my desk involving representation and warranty insurance. As for quick background for those that aren't aware, in your typical acquisition agreement, there will be representations and warranties that a seller makes to the buyer. That induces the seller or the buyer, excuse me, to enter into the transaction. And that state facts as to the status of the business. What is the financial health of the business? What are its assets, its liabilities, its history of litigation and so forth. Typically, the agreement will provide a mechanism after closing for the seller to indemnify the buyer in the event that those representation warranties are not true and are deemed breached. Well, there's a a tool available to sellers and buyers called representation and warranty insurance that will ensure the buyer, typically it's the buyer, that is the beneficiary of the policy in the event that it the representation warranties are not true after closing. And so, why am I seeing more of these deals? I think it's a number of things coming to a head. I think right now the market--the M&A market--involves a lot of uncertainty. I think buyers are being more picky. They're being more deliberate. They're conducting more involved due diligence. Sellers are not getting the valuations that they were getting maybe three, four years ago. And I think while deal flow is certainly not what it was three, four years ago, I think it's probably leveled out now and there's signs there's cautious optimism of an uptick. But still there's still not a lot of deals. And so, where does our representation of warranty insurance come into play? I think that in a in a market like there is now, it can offer sellers a cleaner exit. And so if maybe they're not getting the terms that they might otherwise get because buyers are being pickier and buyers are requiring more buyer favorable terms, it allows sellers to close a transaction and not have the looming cloud of a potential indemnification claim after closing. It allows sellers to offer more buyer friendly terms. because the exposure to risk of the sellers is less than what it would be if there wasn't an insurer that was willing to ensure the potential breach of representation or warranty. And for buyers, you know, it shifts the burden of risk of whether or not they'll recover for a breach of representation and warranty from the seller, which can be uncertain. It shifts that to the insurer and so their exposure to risk is being reduced. Um so I would also say that the market for representation and warranty insurance has been developing and that's not an entirely recently development. I think that's been occurring for a number of years now. But I think market developments like that take time. Insurers used to only insure deals that were larger, in the realm of 100 million or more and I think they're now much more willing to ensure smaller deals down to, I've worked on a deal that was a 10 million valuation and was insured. I think that's because insurers are realizing that this is a profitable market and they're also trying to diversify their portfolios. I think, while big deals involve big premiums, they also involve big claims. So when insurers are realizing, hey, there's an advantage to adding to our portfolio smaller deals that come with smaller claims and diversifying. So those things are coming to a head. I’m seeing more deals involving these types of insurance policies. I also think buyers and sellers are becoming more aware that these policies are available and so they're being used more often. And so, you know, my advice to sellers and buyers, particularly ones that maybe aren't frequent sellers or buyers of businesses, is to just uh make yourself aware that that these policies are available. Engage with your attorney early on. It's better to discuss with the other party of whether or not such a policy will be involved in the transaction early on than later. And just know that it’s another tool that can be used.