The Representations And Warranty Insurance In M&A Deals – How Does It Work ?

Author:Ms Dominique Dumas
Profession:Courtois Lebel

Representations and Warranty Insurance

  1. Purpose

    1. The purpose of the representations and warranty insurance is to cover the financial consequences of claims resulting from a breach of any representations and warranties made by the Seller. 2. The common goal of parties is to ensure that the commitments contained in the Acquisition Agreement matches with the provisions of the insurance contract as accurately as possible. If this condition is satisfied, the contract serves its purpose for both parties: for the guarantor, it transfers the risk of the representations and warranty insurance to a third party; for the beneficiary, it ensures effective coverage of the insolvency risk of the guarantor.

  2. How does it work

    1. There are two types of representations and warranty insurance: one subscribed by the Seller (a sell-side policy) which purpose is to operate as a civil liability insurance (indemnification of the Seller should the buyer be called as collateral; the other subscribed by the buyer (buy-side policy) which operates as a damage insurance (indemnification of the buyer for the financial consequences of the Seller's breach of representations and warranties).

      1. If the insurance is subscribed by the Seller,

      2. When carrying out the insured risk, the insurer shall indemnify the Seller up to the amount of the indemnities owed to it in respect of the implementation of the liability guarantee. For the sake of efficiency, the Seller may stipulate in the insurance contract a direct payment of indemnities to the beneficiary of the guarantee (this is a stipulation for others).

        ii. As the contract of insurance is a random contract, only uncertain events for the parties may be covered (article 1108 section 2 of the French civil Code); the policy cannot be put at stake in the event of deceptive or fraudulent behavior of the Seller at the time of the negotiation and execution of the liability guarantee since the hazard would be lacking here

      3. If the insurance is subscribed by the buyer,

      4. Unlike the policy subscribed by the Seller, the policy subscribed by the buyer allows the insurer to finance the indemnities due by the Seller before any recourse. Hence in case of claim under the warranty, the buyer files a claim directly with the insurer.

        ii. As regards the scope of the insurance policy, it is more extensive than that of the policy subscribed by the Seller since the fraudulent behavior of the Seller cannot be automatically attributed to the buyer...

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