Insurance – Transactions
Carlton Fields represents property and casualty insurers in a wide range of transactional matters, including mergers and acquisitions. As part of our comprehensive M&A practice, we have extensive experience with representation and warranty insurance (RWI), a tool increasingly used by both buyers and sellers to decrease their exposure in M&A transactions.
Representation and Warranty Insurance
In an M&A transaction, inaccuracies in representations and warranties made by the seller or target company can lead to costly liabilities. RWI helps protect both buyers and sellers involved in these transactions from financial loss in cases where representations and warranties contain inaccuracies. Carlton Fields takes a multi-disciplinary approach to handling RWI claims, enabling insurers to respond effectively to both buyers’ and sellers’ coverage claims. Typically, handling these claims involves:
interpreting the subject acquisition agreement;
focused knowledge of Delaware contract law;
fact-based investigation into the claimed breach (e.g. GAAP, tax, legal compliance, etc.)
fact-based reviews of policy exclusions’ applicability; and
valuation of damages.
Our attorneys take a disciplined approach to right-sizing claims. We start with an initial claim review and develop a program to obtain the information needed to reach a coverage determination. We add value by working with subject matter experts who assess the size of the alleged breach and create an appropriate damages model that will be critical in the final analysis once the full loss is determined. We also take the necessary steps to ensure the process is quick and targeted. Insureds and the brokerage community appreciate our clients’ minimally invasive, timely responses.
Some larger claims result from asserting a multiple of historical EBITDA shortfalls stemming from financial statement claims. We review the pricing and valuation methodology of the insured before closing. In most cases, the insured was focused more on what the investment would earn for them during their expected holding period and not on what it produced for the seller during its holding period. Breaches that would not affect future performance—those arising as a result of non-recurring items—would not qualify for multiple based damages. This methodology would resonate with neutrals selected from the forensic accounting and valuation professions.