Representations and Warranties Insurance and Covid-19 Considerations– A M&A Perspective

The Covid-19 has fueled the transaction market, with bold investments in spite of challenges put forth by the global pandemic. Indian deal activity remarkably prospered in certain aspects as India has seen increase of more than 1700 USD million in the year 2020. Also, the Covid-19 has posed significant challenges resulting into uncertainty for buyers and sellers, including Representation & Warranties Insurers. More reliance is put forth on the Representation and Warranties Insurance (the “R&WI”), incorporating significant development brought forward due to pandemic. Such unprecedented uncertainty may give rise to breaches in Representations and Warranties conditions resulting into distressed transactions. This created more need of the R&WI in the current scenario, as buyer and seller may turn to R&WI as an additional risk mitigation mechanism. This article provides a comprehensive analysis of R&WI in a Transaction and its relevance in such uncertain times.

Deciphering the Concept of Representation and Warranties

In the world of commercial transaction whether in M&A or PE/VC investment, parties to a transaction makes certain Representations and Warranties (the “R&W”). R&W refer to statements of facts that is made by the parties to a transaction or these are the statements made which considered to be true with respect to the proposed transaction at the time of successful closing. However, the term ‘Representation’ is not defined under the Indian Contract Act 1872 (the “ICA”), but inferences can made to section 18 of the ICA as misrepresentation is defined as the positive assertion, in a manner not warranted by the information of the person making it, of that which is not true, and such statement is believed to be true. Therefore, representations are the statements made by a party in a transaction with a belief that such statements are true.

  • Mutual Representations Example: “The Parties hereby represents that there are no Legal Proceedings pending, threatened or foreseeable against the either party, which would affect the successful closure of the Proposed Transaction”·
  • One Party Representations Example: “Part A represents that it owns all necessary and privileges titles to each Intellectual Property”

The term Warranty is defined as a promise that a proposition of fact is true. It is a set of promise that a which creates a contractual binding that a condition is or will be true when made or entered into in an agreement. However, the term ‘Warranty’ is net defined under ICA but it is defined under the Sale of Goods Act, 1930 as these are the conditions which are collateral to the main purpose of the contract.

  • Mutual Warranty Example: Each party warrants that it is validity existing and in good standing and is qualified to do business.
  • One Party Warranty: Part A warrants Party B that the Intellectual Property is duly registered in the eyes of law.

In any transaction seller’s R&W are important as they include matters varying from corporate and secretarial compliances, material contracts, financial conditions, business licenses, title and regulatory approvals, tax matters, intellectual property rights, litigations, employment matters and some material facts and information’s.

The Concept of R&WI

The R&WI is an insurance generally used in the various commercial deals in order to protect against the losses and potential liabilities arising from breach of R&W in a transaction, by mitigating or transferring the risks arise through breach of R&W to an insurance firm. R&WI can be purchased by either Buyer or Seller side. However, Buyer side insurance covers the liability for claims of breach of a R&W by the Seller and Seller side insurance covers the Seller liability in the event of breach of R&W.

Generally, R&WI polices are from the Buyer side. The premium for such insurance is around 2-3.5% and premium for specific tax issues amounts to 5-8% of the transactional value. The policy period is generally up to 7 years.

R&WI also brings flexibility in the negotiation process as it is important to disclose that the Buyer or Seller intends to use the R&WI, at the time of signing the term sheet. It provides leverage to the parties in order to determine the R&W in a deal and also the cost of such insurance can be factored into the pricing of deal. It is also pertinent to note that R&WI is based on the R&W made in a transaction and these R&W are subjected to policy terms, underwriting, and due diligence process, which are evidencing adjustments in the process due to Covid-19 impact on the global economy.  Therefore, it is also essential to ascertain “What is the New Normal” based on the Covid-19  related coverage.

Why undertaking R&WI?

The uncertainty in the economy and increase in transactions globally (inbound or outbound or domestic) created the need of the R&WI. Moreover, following are some static factors that encourage the need of R&WI:

  • Companies entering into new jurisdiction or making foreign investments are not entirely aware of the risks associated to such jurisdiction.
  • Strict laws and judicial activism resulting into massive penalties.
  • Uncertainties in Laws.
  • Taxation obligations.
  • Enforcement through court is time consuming process.

Benefits of R&WI

R&WI may be seen as the best alternative for the parties concerned about the liability risk particularly buyers. R&WI allows buyers to submit no-indemnity bids. The purchase of the R&WI only makes sense if the benefits attached to such policy exceeds its costs.

Following are some benefits attached to the R&WI:

  • Reduce the cost and risk associated to the proposed transaction.
  • Preservation of the relationship after the acquisition.
  • Reduce the potential liabilities and obligations.
  • Reduce the amount of the purchase price held in escrow account (amount payable at the time of closing).
  • More efficient and easy negotiations among the parties.
  • Helps the parties to a cleaner exists.
  • More quicker closing of the transaction.
  • More extensive representations and warranties in order to persuade the parties to enter into the legal binding.

Limitations of R&WI

R&WI plays a significant role in the transactions where there is uncertainty with respect to the fulfillment of the R&W as it transfers some of the transaction related risks to an insurer. However, there are certain exclusions and limitations of such risk mitigating tool, few of them is listed below:

  • R&WI is not a perfect replacement of all risks associated to the transactions, as it only covers only those R&W which are mentioned in the definitive agreements or in such policy.
  • R&WI are limited to the extent as indemnity cap is on the amount of the proposed transaction, for say 10% of the purchase price.
  • R&WI are subject to extensive negotiation between the insurer and insured.
  • R&WI excludes claims with respect to any matter which is in knowledge of the insured.

Covid-19 and R&WI

The M&A landscape has experienced a massive turmoil due to the pandemic, due to which R&WI market is evolving rapidly across the globe. Covid-19 related Representation, Warranty and Indemnity are being excluded in the through such policies especially with respects to transactions in Hospitality, Healthcare, Retail, Entertainment, Public Transport, Supply Chain industries. The underwriting risks associated with the pandemic is depending upon the case-to-case basis and also depends upon negotiations entered between the insurer and insured in order to tailor the exclusions to the actual risks associated.

However, R&WI should be seen as a risk mitigation tool and not as a mere solution to such risks.  It is also important to carve out the definition of the “Material Adverse Effect” (the “MAE”) in the definitive agreements as some times it is used to qualify the R&W in a transaction. Therefore, it should be effectively negotiated as transactions involving long periods could give rise to concerns associated with Covid-19.

Due Diligence on the Covid-19 related risks and negotiating the material and knowledge risks and incorporating those in the language of the R&W in the definitive agreements will determine the insurance cover for the proposed transaction. Therefore, it is essential to determine the “New Normal” in R&WI in M&A.

However, the Covid-19 is unlikely to change the risks associated with the breach of Fundamental Representations in any transaction. Moreover, losses arising out of business interruption or other losses due to pandemic should be carefully underwritten in the insurance policy.


The R&WI provides a tool to mitigate certain risks associated with the proposed transaction (M&A or Investment Transactions). Generally, such insurance is purchased by the buyer side (an insured party), as it provides some assurance of indemnification of loss arises due to breach of R&W, subject to clauses like basket, caps, survival etc. in the definitive agreements. It is also essential to evaluate the cost of such insurance and how it will be factored. It is also essential to tailor the risks associated to the pandemic through negotiation and to bring it down to R&W. Therefore, the language of the R&W should determine what risks are excluded and what risks are covered under R&WI.

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June 2021