Buy-Side vs. Sell-Side Policies - Which is Best for You? (Part 1)

As readers of my blog know, representations and warranties insurance provides coverage for a breach of the warranties given in a sale purchase agreement. Although it is always a breach of the seller’s warranties that is the trigger for coverage, either the seller or the buyer can be the insured. Premium can also be paid by either or both parties. If the seller is insured this is referred to as a sell-side policy and if the buyer is the insured a buy-side policy is placed.

In about 80% of the representations and warranties policies sold in the United States, the buyer is the insured party (Buy Side). As large as that figure is, that still means a solid 20% of policies have the seller (Sell Side) as the insured.

With the broadening of the market and a greater familiarity and usage of the product, we are seeing a small but definite increase in the use of sell-side policies.

Which is best for your transaction? In this two-part series I will address both sell-side and buy-side policies, and the pros and cons of each. We begin the series with sell-side insurance.

Sell-Side Insurance

Pros for the Seller

• Control of the policy

If you—the seller—are the insured, you will be directly involved in the underwriting process. It will be your responsibility to provide the required documentation as well as access to the data room. The underwriter will likely want you to provide documents like the Q&A diligence tracker and the evolving versions of the Sale Purchase Agreement. The seller’s lawyer negotiates the wording of the agreement. As a result of all this, you get the benefit of knowing exactly what coverage you are getting and are able to tailor it to your own needs. You will have seen all the options available when your broker does the initial marketing and can be confident you are getting the right coverage at the best price.

• Control of a claim

In the event of a claim, you are the one dealing with the underwriter and your desired outcomes are aligned. You have greater insight into the claim process and have a strategic partner to work with.

Cons for the Seller

• Obligation to remain available and involved in claims

If you are looking for the cleanest exit possible, then having to be involved heavily in the claims process may be less appealing.

• Higher premiums

While the pricing of reps and warranties policies is extremely situational, there is a tendency for sell-side premiums to run a little higher as underwriters view them as a slightly higher risk.

Pros for the Buyer

• Limited involvement in policy

As the buyer you have no real involvement in the placement of the policy.

• Limited involvement in claims

In the event of a claim, whether the seller is able to obtain reimbursement or not, you are not impacted. Nor do you have to spend time or energy in the claims process.

Cons for the Buyer

• Not as attractive an option to the seller

“Easier to deal with” becomes a moot point if it costs you the deal in the first place. Private Equity will offer Reps Insurance as part of any serious bid they make. Your bid won’t be competitive without it.

In any transaction there will always be competing interests. One of the gifts of reps and warranties insurance is the ability to remove some contention in negotiating these differing positions. Using the right structure and having the right insured—either seller or buyer—makes for even plainer sailing.

In Part Two of this series, I will discuss buy-side policies and the pros and cons of each.