Avoidable Costs and Fees When Purchasing Reps And Warranties Insurance

Representations & Warranties Insurance (“RWI”) has become increasingly important in M&A deal negotiations, which means the expense of obtaining RWI is often a requisite (and not insignificant) transaction cost. Buyers typically insure for ~10% of the target’s enterprise value. Current RWI Rates on Line (premium expressed as a percentage of the limit) can range from 3.2% - 4.0% (e.g., for a $10M limit: $320K-$400K in premium). When purchasing RWI, AP advises buyers to be aware of avoidable costs and additional fees.

Avoidable Costs: For acquisitions using policy limits over $25M, it is necessary to build an insurance tower with multiple excess insurers. Building a tower of multiple insurers will increase insurance capacity and lower the blended Rate on Line because each excess layer is discounted from the previous layer/tranche. The amount of that discount (aka the “Increased Limit Factor” or “ILF”) used by AssuredPartners is .75, consistent with traditional RWI tower structuring. Each additional layer of the insurance tower produces a 25% lower premium rate than the previous layer. However, some RWI brokers regularly use ILFs of .80 or more. This can result in a significant cost difference. For example, for an RWI policy with $100M in aggregate limit, the cost difference between a 75% ILF and an 80% ILF could be greater than $350,000!

Additional Fees: In addition to the RWI premium, a number of RWI insurance brokers charge “limit-based compensation,” which is a fee calculated by subtracting (x) the RWI policy’s built-in commission from (y) an amount equal to .75% or more of the policy limit. This fee may be presented to the buyer as part of a single overall cost, aggregating the fee with the premium and taxes. Buyers should be cognizant of any additional costs attributable to fees.

Contact us if you’re interested in AssuredPartners’ alternative approach RWI Insurance.