What is Reps and Warranty Insurance? – The Basics

What is R&W Insurance?

R&W insurance is a type of insurance policy purchased in connection with corporate transactions, and covers the indemnification for certain breaches of the representations and warranties in the transaction agreements.

This article is primarily for those intending to sell their business, and due to the complexity and risks involved in securing both employment and a sale in the UK, it is recommended that you seek legal guidance if purchasing a R&W insurance policy.

What is the aim of the insurance?

R&W Insurance, specifically Construction R&W insurance, is designed to cover breaches of the contractual representations and warranties.

What does it cover?

R&W insurance covers the insurance of material breaches of:

• the duties of a seller and a buyer;

• claims relating to delivery of goods to a purchaser, where there has been delay in delivery of goods to a purchaser;

• claims relating to changes in customer or client circumstances after delivery of goods;

• claims relating to losses caused by errors in the supply of goods;

• claims relating to storage conditions, the correct installation of products, the complete refund of customers, and

• all other claims arising under the agreements or contracts between the parties.

Generally, the seller should maintain a registry of goods for which they provide warranty or repair guarantees. The registration and warranty guarantee form part of the guarantee of performance of the insurance.

Is the coverage only available for a limited time?

The coverage is available for the entire duration of the contracts for the repair or replacement of the valuable business assets.

What is the amount of money that will be reimbursed to the seller?

The compensation amount is not a major factor as there are several potential challenges that could cause any sale of a business to fail, and the buyers are likely to ask for significant extra funds to complete the transaction. For example, it may involve unforeseen problems that are impossible to predict. The purchase of any large business could be fraught with potential pitfalls, therefore, it would be prudent for the buyers to make substantial profits in order to mitigate the loss.

What type of company is covered?

The type of company is not important, only the type of assets being covered.

Who should purchase R&W Insurance?

R&W Insurance is usually purchased by companies that have undertaken transactions in which one party sold the company’s assets to the other party without a legally binding Warranty Deed.

For example, imagine you are selling your company to a buyer. At the closing, the buyer has a warranty deed in which the buyer transfers to you a new company that owns the company’s assets. However, this warranty deed does not contain a covenant of good faith and fair dealing, and the buyer has agreed to be bound by the warranty deed as if the contract were in writing and signed.

This means that, under common law, there is a default in the buyer’s conduct, and that the seller has the right to proceed against the buyer in court, alleging the following:

A breach of the warranty deed.

Conclusion

It can be tedious and time-consuming for an automobile or truck dealership to conduct a commercial transaction between two parties, especially for transactions that involve heavy-duty machines. The parties may not be able to agree on the terms of the commercial transaction in the initial stage. In order to avoid unpleasant problems later, the dealer should cover these types of risks.

Ask your auto dealer about coverage for both representative and warranty warranties.

Answering the following questions will help you determine your needs and find an affordable coverage.

What are your existing warranty obligations?

Some warranties for repairs and commercial transactions are provided under the guidelines set out by the National Automobile Dealers Association (NADA).

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