Representations & Warranties Liability Insurance
The Competitive Environment
The changing nature of business and the forces shaping its future-like globalization and technology-are but a few of the challenges facing executives on a daily basis. Managers actively respond to this dynamic business landscape by constantly changing their business strategy. Creating a competitive advantage may include many types of business transactions such as a purchase, sale, merger, or acquisition.
After these transactions, you focus on creating value and integrating change into your organization. However, undiscovered liabilities associated with a transaction may arise at a later date and have a significant impact on your bottom line. You could risk losing any benefit derived from the transaction as a result of these unanticipated liabilities.
How can these unanticipated liabilities arise?
Typically, during buy/sell transactions, the seller makes contractual "representations and warranties" that form the foundation for the purchase decision. The representations and warranties also serve as a basis for the buyer to sue the seller if a representation or warranty has been breached. The seller provides these representations in good faith in a transaction document; the buyer relies upon these statements to close the transaction. In a perfect world, this would be adequate. However, undiscovered liabilities can and do arise.
One Company's Story.
The purchaser of a company sued the seller for breach of warranties regarding the salability and value of the company's inventory. In the sale agreement, the seller represented that the inventory was usable and salable and was carried on the books at a specific value. After the closing, the buyer discovered that most of the inventory was not salable and that the books and records of the seller improperly stated the inventory. The courts found that the purchaser was entitled to approximately $600,000 in damages, prejudgment interest, and attorney fees.
How can you protect yourself?
Chubb's new Representations and Warranties Liability Insurance Policy can help you guard against undiscovered liabilities that emanate from a purchase, sale, merger, acquisition or other business transaction. The policy helps protect the seller from financial loss resulting from a lawsuit caused by a breach of an insured representation or warranty.
The following questions and answers will help you understand the issues surrounding the liabilities that can develop as a result of a breach of a representation or warranty. They also will explain how the Representations and Warranties Liability Insurance Policy from Chubb addresses the risks associated with a breach of a representation or warranty.
What is a representation or warranty?
A representation or warranty is made in writing by a seller in a business transaction.
Generally, representations are statements of past and existing facts; warranties are promises that existing or future facts are or will be true. These representations and warranties provide the buyer with information essential to the decision to implement the transaction.
What are some of the typical representations and warranties of sellers in a transaction?
Representations and warranties are found in a transaction document (e.g. the purchase & sale agreement) and will vary greatly depending upon the nature of the transaction. Some of the more common representations and warranties of sellers found in such documents relate to:
- Financial statements
- Accounts receivable
- Taxes
- Employee benefits
- Intellectual property
For example, a representation or warranty relative to financial statements may provide assurances regarding the quality and accuracy of these statements. While the accounts receivable representation or warranty may offer line-item support to the more general representations regarding the financial statements as a whole.
Can a seller be sued for the representations and warranties made?
If it is discovered after the closing that the seller has breached one or more of the representations or warranties, the buyer can sue the seller. The representations made by the seller in the transaction document provide a basis for the buyer's right to indemnification and other remedies.
What is Representations and Warranties Liability Insurance?
Representations and Warranties Liability Insurance helps protect the seller from financial loss, resulting from a lawsuit, caused by the breach of an insured representation or warranty provided in a transaction document. Since these documents vary depending upon the nature of the transaction, the insurance coverage is crafted to meet the unique needs of the transaction.
Who does ft cover?
The Representations and Warranties Liability Insurance Policy covers the selling company and any designated owners, directors, officers, or employees.
What triggers the insurance policy?
The policy is triggered when a lawsuit or written demand is made by the buyer against the seller for a breach of an insured representation or warranty provided in the transaction document.
What does it cover?
The Representations and Warranties Liability Insurance contract will pay those amounts the seller is legally obligated to pay including damages, judgments, settlements and defense costs.
This is a highly specialized insurance coverage. It is vitally important you discuss this coverage with a qualified insurance agent and your legal counsel. Contact us so that we can put you in touch with a qualified agent.
Source, Chubb & Sons