133 The rapid growth in representations and warranties (R&W) insurance utilization in the Israeli market has paved the way for more “synthetic” coverage frameworks, redefining post-closing recourse in complex transactions. Representations and warranties (R&W) insurance, known in some jurisdictions as warranty and indemnity insurance, is a transactional risk insurance product designed to allocate financial exposure arising from breaches of representations and warranties in mergers and acquisitions. Over the past few years, the use of R&W insurance has significantly increased in Israeli mergers and acquisitions as a risk allocation tool, with a growing number of policies used on various types of Israeli M&A and investment transactions. As such, R&W insurance has evolved from being a niche solution available on the Israeli market to an increasingly commonplace tool. One of the impacts of this growth is that insurance markets are becoming better acquainted with Israeli companies and the way that Israeli M&A deals are conducted. There is significantly more insurer appetite to support less-standard structures of Israeli M&A or investment transactions than before. The mechanics of R&W insurance R&W insurance is designed to protect against financial losses arising from a breach of any of the sellers’ representations given in the underlying purchase agreement. R&W insurance benefits both the buyer and the seller as it typically allows for losses to be shifted from the deal parties to third-party insurance providers. In a conventional acquisition, the seller provides a series of contractual representations regarding the condition of the target company. These representations typically address the accuracy of shares ownership and title, financial statements, tax compliance, ownership of assets, intellectual property rights, material contracts, regulatory compliance, litigation status, employment matters, and environmental exposure, among others. The purpose of these representations is to allocate pre-closing risk. If a representation proves inaccurate and results in a financial loss for the buyer, the buyer may assert a claim under the indemnification provisions of the purchase agreement. The indemnity framework in a standard transaction is heavily negotiated. It includes survival periods, caps on liability or deductibles, materiality qualifiers and knowledge qualifiers. These provisions reflect the tension between a buyer seeking protection from unknown liabilities and a seller seeking to limit postclosing exposure. The negotiation of indemnity terms often becomes one of the most time-consuming and contentious aspects of transaction documentation. R&W insurance materially alters this dynamic. Under a buyer-side policy, the dominant structure in today’s market, the insurer agrees to indemnify the buyer directly for covered losses resulting from breaches of the representations contained in the acquisition agreement. The seller’s liability is correspondingly reduced to a retention amount or limited exclusively to cases of fraud. This has numerous benefits for the seller; it (i) allows the seller to achieve a cleaner exit while providing the buyer with recourse against a creditworthy insurer; (ii) provides an alternative risk allocation solution to escrows, guarantees, and holdbacks; (iii) expedites and eases the negotiation of the representations package between the parties; and (iv) protects key relationships where management or former shareholders remain involved in the business or retain holdings in the company post-closing. On the back of such trends, it is becoming increasingly common to see transactions where the seller’s liability is capped at nil or US$1. The underwriting process for an R&W policy is diligence-driven. Insurers review the transaction documents, diligence reports (legal, financial, tax, technical, and environmental, as applicable), and disclosure schedules. They assess both the substance of the target’s business and the materiality level of the buyer’s diligence. The insurer’s risk assessment is not theoretical; it is grounded in the quality and completeness of the diligence performed. On most transactions, policy limits generally range between 10% and 30% of enterprise value or the transaction value, with additional capacity available US-ISRAEL — R&W INSURANCE
RkJQdWJsaXNoZXIy MjgzNzA=