Representation and warranty insurance (R&WI) has become an integral component of the M&A landscape and is here to stay. The data speaks for itself: in 2014, more than 700 U.S. R&WI policies were issued, which was double the amount of policies issued in 2013 and quadruple the amount of policies issued in 2012. M&A deal professionals who don’t understand the product, and its strategic uses and pitfalls, risk being left behind.

The projected growth for 2015 is up to 20 – 30%. Why has R&WI become so popular? In the classic battle over the indemnity package between the parties to an acquisition agreement, buyers want very broad coverage for all pre-closing issues that could arise following the transaction and sellers want no or very limited exposure as they exit their investments. R&WI helps, for a price, to bridge this gap and permits both buyers and sellers to achieve their objectives.

However, R&WI is not a one-size-fits all, complete solution for risk allocation, and the approaches and policies will differ from deal to deal depending on the industries involved and transaction specific issues. Furthermore, the R&WI market, which is continually evolving and dynamic, is influenced by, among other things, maturation of underwriting models, evolution of key deal terms, claims history and the increasing demand for the product...