For the last post of 2017 I thought I’d pass on a bit of Reps and Warranties Insurance wisdom I recently received.
I had the pleasure of speaking on a panel at the American Conference Institute (ACI) M&A Liability conference last week with the highly regarded and well-known Peter Rosen of Latham and Watkins. He cleverly explained coverage under a reps and warranties policy with the aid of a Donald Rumsfeld quote. He said we were all free to use it going forward and I’m taking him at his word.
When talking about weapons of mass destruction, Mr. Rumsfeld famously said:
There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don’t know. But there are also unknown unknowns. These are things we don’t know we don’t know.
So how does this apply to reps and warranties insurance? Let’s break it down.
“There are known knowns. These are things we know that we know.” When talking about coverage, the “known knowns” are issues the company already has or that are uncovered during due diligence. Examples would be pending litigation or an IRS audit. Under the principle that you cannot buy home insurance once your house is already on fire – these are not covered.
“There are known unknowns.” These are matters we know about but have not crystalized yet. Examples would be straddle period taxes or purchase price adjustments. We know that these things will become both known and due but they are not losses and are not covered.
“But there are also unknown unknowns. These are things we don’t know we don’t know.” Examples are; the expired license not picked up during due diligence, the customer contract that gives the customer the right to terminate in the event of an acquisition that’s been incorrectly reviewed, the accounting mistake lying dormant. Reps and warranties insurance is specifically designed to cover these and does so very well.
I hope this makes reps and warranties a little clearer or at least easier to remember. I look forward to resuming my posts in 2018 which promises to be another year of development in an ever moving market. I wish you happy holidays till we speak again.