Representation and Warranty Insurance


In a recent Legal Post Article Drew Hasselback prognosticates that representation and warranty (R&W) insurance “may pick up steam in Canada this year”.  While R&W insurance has been around for more than 20 years, it has never gained significant traction in the context of M&A transactions in Canada.  Is this about to change?

The traditional approach to risk allocation in purchase and sale transactions is often multi-pronged and involves purchaser due diligence, vendor representations and warranties and related indemnities, escrows and other holdbacks.  As an alternative or supplement to these strategies, many insurance providers offer R&W insurance to purchasers and vendors.  While an intriguing product and one that ought to at least be theoretically helpful in bridging valuation and risk allocation gaps, and though on the uptick globally, R&W policies are placed in a very small percentage of M&A transactions in Canada.

The lack of penetration of R&W policies in Canada can be largely explained by cost — with premiums generally ranging from 2-5% of the coverage limit and deductibles typically settling in between 1-3% of the transaction value — and lack of familiarity.  It’s this latter explanation that could be on the precipice of changing, with, as Hasselback notes, U.S.-based private equity firms who are more experienced with these sorts of products completing more and more transactions in Canada, particularly on the sell-side where a key concern is limiting holdbacks and most certainly recalls of capital from their investors.

Observers have been anticipating this trend for some time now, so it remains to be seen if 2015 is the tipping point.