Representations and Warranties Insurance: An Essential Component of Healthcare Mergers and Acquisitions

Introduction

The aggregate value of global transactions in the mergers and acquisitions market exceeded $3 trillion annually between 2014 and 2019.¹ With surplus capital, consistent growth, and low interest rates helping to drive this trend, optimistic buyers hoping to seize the opportunities of a strong market found themselves exploring options that would allow them to present sellers with more attractive offers while creating a competitive advantage over other bidders. One such approach was to turn to the use of transactional risk insurance, which historically was not a strategic resource used in mergers and acquisitions. Generally falling into one of three categories -- (1) representations and warranties insurance (R&W Insurance), which provides coverage in the event of a breach of any of the seller’s representations and warranties, (2) tax insurance, which covers tax issues ranging from sales and use taxes to transactions involving tax-exempt organizations, and (3) contingent liability insurance, which may include coverage for pending litigation, intellectual property or employment disputes, shareholder or member disputes, risks involving title, or regulatory matters specific to the acquired business -- transaction risk insurance expedited the deal-making process by easing negotiations of purchase agreement terms and allowing sellers to maximize access to and use of purchase price proceeds, all while addressing the parties’ post-closing exposure and security concerns, by shifting risk to one or more third-party insurers.² Over a relatively short period of time buyers and sellers began to recognize the value of transactional risk insurance, and as demand grew the use of such products evolved into a fundamental component of deal activity.