What Representations and Warranties Doesn’t Cover
A key driver behind the use of R&W insurance has always been the reduction or elimination of a seller’s escrow. By allowing sellers immediate access to the sale proceeds from a divestiture for distribution to limited partners, insurance becomes an attractive and economic tool for sellers and an acceptable risk transfer mechanism for buyers.
However, R&W insurance is not a complete “wrap” around all of the obligations typically covered by an escrow. In most transactions, the escrow is established to respond not only to claims for breaches of R&Ws, but also to other potential liabilities that the seller retains post-closing.. Special indemnities for known matters (eg., existing litigation or environmental exposures) and more general indemnities for tax matters, target expenses not accounted for in determining the purchase price and losses resulting from the seller’s failure to perform or breach post closing covenants can all be covered by an escrow.