Link to PART 4: The Interaction Between Purchase Agreement Remedies and RWI Coverage PART 4: The Interaction Between Purchase Agreement Remedies and RWI Coverage
Introduction
Representations and warranties insurance (“RWI”) has changed the way buyers and sellers allocate post-closing risk. In many transactions, RWI allows sellers to significantly limit their post-closing indemnification obligations while providing buyers with a separate source of recovery for breaches of representations and warranties.
But RWI does not necessarily replace the remedies available under the purchase agreement. Seller indemnification, escrows, purchase price adjustments, covenant claims, fraud remedies, and other negotiated rights may continue to exist alongside the insurance policy. When a post-closing issue arises, understanding how those remedies interact with RWI coverage can be critical to developing an effective recovery strategy.
For buyers and deal professionals, that means considering the purchase agreement and RWI policy together—not only when structuring the transaction, but also when determining how to proceed following a breach.
RWI and the Traditional Indemnification Framework
Historically, purchase agreements for acquisition of privately held companies typically allocated the risk of an inaccurate representation or warranty through seller indemnification. Buyers could pursue the seller for covered losses, often subject to negotiated caps, survival periods, and escrows established to secure the seller’s obligations.
RWI alters that traditional framework. In many RWI-backed transactions, seller liability for breaches of representations and warranties is substantially reduced or, in some cases, eliminated altogether, with the insurer assuming most if not all of that risk. This structure can benefit both sides of a transaction: sellers obtain greater certainty regarding their post-closing exposure and liquidity, while buyers retain a source of recovery if an insured representation proves inaccurate.
The presence of RWI, however, does not mean that the purchase agreement becomes irrelevant once the transaction closes. The agreement continues to define the representations being insured and may preserve separate remedies against the seller for matters outside the policy’s coverage.
When Multiple Remedies Remain Available
Depending on the transaction, a buyer may have more than one potential avenue for recovery following closing. The purchase agreement may preserve seller liability for fraud, breaches of covenants, purchase price adjustments, specifically retained liabilities, or other negotiated obligations. An escrow or limited indemnification arrangement may also exist alongside the RWI policy.
As a result, identifying a post-closing issue may require more than simply determining whether an RWI claim exists. The buyer should also consider whether the issue gives rise to a remedy under the purchase agreement and how the available recovery paths interact.
That analysis can raise practical questions about timing and sequencing. Should notice be provided to the insurer while the buyer is pursuing indemnification from the seller? Should the buyer proceed against both simultaneously? Do the purchase agreement or policy impose separate notice requirements or other procedural obligations that must be satisfied?
There is no single answer applicable to every transaction. But evaluating these questions early can help preserve available remedies and avoid taking positions in one recovery effort that may complicate another.
Survival Periods and the Timing of Recovery
The interaction between contractual survival periods and RWI coverage provides one example of how the remedies available under the purchase agreement and policy may differ.
Under a traditional indemnification structure, the survival periods negotiated in the purchase agreement often determine how long a buyer may pursue the seller for a breach. An RWI policy, however, generally establishes its own coverage periods for insured representations, which may extend beyond the periods during which the seller remains liable under the purchase agreement.
This distinction can be particularly important where a potential breach is discovered well after closing. The expiration of a remedy against the seller does not necessarily mean that insurance coverage has also expired. Conversely, the existence of an RWI policy does not eliminate the need to evaluate applicable contractual deadlines or other remedies that may still be available.
Understanding which deadlines apply to each potential avenue for recovery—and providing timely notice where required—can therefore be an important part of post-closing claim strategy.
Coordinating the Recovery Strategy
When a potential breach arises, coordination between the deal and insurance recovery teams can be particularly valuable.
The deal team often has important context regarding how the relevant representations, indemnification provisions, and other remedies were negotiated, as well as the commercial considerations underlying the parties’ allocation of risk. Insurance recovery counsel, in turn, can evaluate how the policy responds to the issue and identify potential notice, coverage, or claims considerations.
Bringing those perspectives together early can help determine whether recovery should be pursued from the insurer, the seller, or both, and ensure that the different workstreams remain aligned. It can also reduce the need for the client to reconstruct the transaction history or serve as the primary link between teams once a disputed claim is underway.
This coordination is particularly important because steps taken in one recovery effort may have implications for another. A position advanced in a seller indemnification demand, for example, may later become relevant to the insurer’s evaluation of the claim. Considering the potential insurance implications at the outset can help the buyer pursue available remedies consistently and strategically.
Different Remedies, Different Sources of Recovery
Ultimately, RWI should be understood as part of the broader remedial structure established by the transaction rather than as a complete substitute for it. The purchase agreement determines which obligations remain with the seller, while the policy establishes the circumstances under which the insurer will respond to an insured breach.
Those recovery mechanisms may overlap in some circumstances and remain entirely separate in others. Understanding the distinction becomes especially important where a buyer obtains—or may obtain—recovery from more than one source, because RWI policies generally contain provisions designed to prevent duplicative recovery.
We will address the allocation and “no double recovery” issues in greater detail later in this series.
Conclusion
RWI has significantly changed the traditional post-closing remedy structure in M&A transactions, but it has not displaced the remedies negotiated in the purchase agreement. Instead, the purchase agreement and RWI policy operate together to allocate risk and establish potentially different avenues for recovery when an issue arises.
For buyers and deal professionals, the key is to understand those avenues before a claim develops and to evaluate them together once a potential breach is identified. Early coordination can help preserve available remedies, satisfy applicable notice requirements, and position the buyer to pursue recovery effectively under both the transaction documents and the RWI policy.
This Series
This post is part of our RWI in Practice series examining practical issues that arise throughout the lifecycle of an RWI policy. In the remaining installments, we will address common post-closing claim scenarios, the realities of pursuing recovery under an RWI policy, and allocation and “no double recovery” issues that can arise during the claims process.