What is rep and warranty?

What is rep and warranty?

What are Reps and Warranties? Reps and warranties refer to statements of fact that a seller makes as part of trying to persuade a buyer to purchase their business. Each of the parties in the transaction relies on the other to provide true information about the transaction.

What does reps and warranty insurance cover?

Representations and warranties insurance is an insurance policy used in mergers and acquisitions to protect against losses arising due to the seller’s breach of certain of its representations in the acquisition agreement. The policy coverage is typically a dollar amount equal to 10% of the M&A purchase price.

Does rep and warranty insurance cover fundamental reps?

RWI policy periods typically provide six years of coverage for breaches of fundamental and tax reps (where not specifically excluded) and three years of coverage for non-fundamental reps.

How much does reps and warranties insurance cost?

Cost of Coverage Nowadays, in the United States, a price range of 2.5% to 4.0% of the coverage limits is typical. Thus, a reps and warranties insurance policy with a $20 million limit of liability on a moderately complicated deal might cost approximately $650,000.

How long do reps and warranties last?

Under a buy-side RWI, the policy generally offers a survival period of 12 to 18 months, which goes beyond the typical indemnity package, with three years for general reps and warranties and six years for basic reps and warranties and for tax-related issues.

Should reps and warranties survive termination?

The length of the survival period limits the time during which claims may be brought for breaches of reps and warranties. If a purchase agreement is silent as to survival, reps and warranties survive until the applicable jurisdiction’s statute of limitations for claims for breach of contract lapses.

How long do fundamental Reps survive?

Fundamental representations and warranties may have a 3-5 year survival period, whereas intermediate and non-fundamental warranties may have 18-24 month survival periods respectively.

Why are reps and warranties important?

Representations and warranties are especially important during the due diligence period, since this is the time that allows the signers to further investigate claims made before entering into the agreement. The purpose of representations and warranties is to disclose information between the two parties.

How common is reps and warranties insurance?

One recent estimate suggests it is now used in 20-25% of U.S. private transactions. R&W Insurance can be purchased as either Seller Side or Buyer Side coverage. Seller Side coverage is a form of liability policy, covering the Seller’s liability for claims of breach of a representation or warranty.

How long Reps survive?

It is not uncommon for parties to a purchase and sale agreement in a private target M&A deal to agree that representations and warranties will survive somewhere between twelve and twenty-four months following closing; which in each case is much shorter than the three-year or six-year statute of limitations.

Does warranty survive termination?

The survival clause in Marathon provided that some representations and warranties survived indefinitely after closing, others survived until the expiration of the applicable statute of limitations, and yet others survived for a period of 12 months after closing.