Reducing Financial Risk

RWI Trends & Claims Best Practices

By Mike Besler & Travis Holt

We wanted to take a few minutes to share some of the current RWI trends & claims best practices with you.  This is a growing area of insurance and many of our private equity clients are using RWI more frequently than ever before.

RWI Trends

Over the last several years, the use of RWI (representations and warranties insurance) has increased significantly. RWI is frequently used to supplement the indemnification obligations traditionally imposed on sellers in private company deals and has expanded with both corporate and private equity buyers being frequent purchasers of the product. RWI is designed to cover unknown and unintended breaches of representations and warranties made in purchase agreements.  As mergers & acquisitions have increasingly become more litigious, the use of RWI has increased. One of the reasons for this uptick is that RWI is a more affordable option than the traditional escrow holdback option used in transactions.

RELATED: Rep & Warranty Guide from Forbes

What are the positives for the seller and buyer?

SELLERS – Purchasing RWI allows for the elimination of an escrow holdback and provides a cleaner exit for the seller because the buyer can now claw back against an insurance company instead of the seller.  Furthermore, there are fewer contingent liabilities associated with the sale of the company.  RWI allows the seller to get all of their proceeds up front without having to worry about any ongoing liabilities.

BUYERS – As for the buyer, RWI generally provides more protection and gives more time to discover problems with the purchased business.  Additionally, RWI can improve the buyer’s likelihood of winning a claim.  A buyer would rather chase down an insurance company with a strong balance sheet than the seller who is enjoying their exit on a tropical island.

Best Practices for filing a claim

It is best practice for the insured to provide notice of a potential claim as soon as reasonably possible and provide a detailed description of the facts and circumstances that resulted in the breaches. Within these facts and circumstances, we work with the insured to specify the following:

  1. Provide notification to the insurer of the representations were breached
  2. Provide a detailed description of the facts
  3. Provide the circumstances of the breach
  4. Provide the calculation of damages

Generally following this notification, the insurer will ask for more information to support the claim. We recommend for the insured to schedule a call with the client, counsel, underwriter, and claims team to expedite this process. The insured should clearly define the valuation methodology of their claim upfront to avoid confusion of whether or not a multiple should be applied. Additionally, the insured should know how the insurer handles claims before finalizing RWI agreements. One trend we are currently seeing success with is the concept of a dual track process. The dual track process is where the insured works with the insurer and the seller. Although fairly simple, this transparency has yielded greater results and progress when filing a claim.

We hope you found our information on RWI trends & claims best practices valuable but if you have more questions, feel free to reach out to our private equity team.

Click here to read our related post on the Top Specialty Insurance Brokers in the US