1. Rep and Warranty Products
Used very heavily in the Private Equity Market. Approx. 70 % of PE firms use them.
Seller R&W policies are generally used for deal terms. Survival of rep and Warranties,
escrow, limit of liability provided. These are quite often used by seller’s attorneys and M&A
consulting firms looking to structure the best terms for their clients. Often converted to a buy
side for the seller’s fraud.
Buyers buy this policy for insurance on the Reps and Warranties made in the purchase
and sale agreement. Buy side coverage would cover seller’s fraud where the sell side will not.
Things typically Represented are as follows
1. Is the seller authorized to sell the company
2. We have no environmental known losses or potential
3. There have been no products liability losses in the last 5 years
4. We are in environmentally in compliance
5. Our health care is being offered in compliance by state
6. No known strikes pending
7. There are no other liabilities than those shown on the financial statement or those in
the ordinary course since the financial statement.
8. There are no discontinued products liability issues
9. We have not sold anything where we kept the pre closing liability
10. We are in compliance with emissions either air, ground or water.
11. These are the known toxins and here is how they are managed
Known is a big part of this. There is known and should have known. Initially it was just
known now it usually says should have known. An example would be if Company A wanted to
buy Company B, and after the purchase is complete Company A discovers that the products
being manufactured by Company B were poisonous. Company B’s CEO had no knowledge of
their poisonous product when he signed the purchase and sale agreement. But Company B
should have known of its existence. The Reps & Warranty insurance would protect Company A
from that exposure, if they warranted no known defects in the products.
2.Tax Opinion
Is used where there may be some difference in opinion on how the IRS will decide on a
particular issue. This is usually resolved with an opinion from a reputable law firm. The example
I will use drives the point home but was not placed. We were approached by a PEO that worked
with actors and actresses.
What makes this unique is the frequent change of jobs. Every time an employee started
a new job the employer withheld as if this was a new employee. At the end of the year the
withholding was well in excess of the maximum withholding. The PEO was considering that
income and wanted to insure that practice. It was a common industry practice. But because it’s
unethical and unlawful the legal professionals would not sign off on it.
2. Loss Mitigation
Is an insurance product used to take exaggerated suits off the books or reduce them
drastically? Let’s say you wanted to sell Company A. Someone sued you for $100mill. A
company such as AIG might say we can settle that for $30 Mill and charge you $50Mill. That
makes your liability a reduced liability and AIG can potentially make potentially $20Mill.