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Representations and warranties insurance – An increasingly important tool for Canadian dealmakers

Author(s): Michael Budabin McQuown, Marc Kushner, Brian Gray, Mary Abbott

Dec 8, 2020

In 2020, representations and warranties insurance (RWI) continued to play an increasingly significant role in the Canadian private M&A market. RWI is an insurance policy, usually obtained by a buyer, that replaces all or most of the traditional seller indemnification obligations for losses that arise due to breaches of, or inaccuracies in, seller representations and warranties. As a result, depending upon the structure of the transaction and the policy, a seller is able to significantly reduce or even eliminate its post-closing indemnification obligations. At the same time, a buyer is able to retain the indemnification protection that it would normally seek to have in a traditional M&A deal. RWI is commonplace in the United States and its presence in the Canadian market has been rapidly expanding over the last few years. In this article, we explore the state of the Canadian RWI market in 2020, including the impacts of COVID-19.

RWI use in Canada continues to grow

Use of RWI in Canada has become an increasingly common tool for Canadian dealmakers, a trend that seems to be continuing despite the COVID-19 pandemic. Though RWI is still not as prevalent in Canada as it is in the United States, a bidder in a competitive process in Canada, such as an auction, should expect that a seller is likely to propose RWI in lieu of traditional indemnification provisions. A bidder in search of a competitive advantage should be prepared to either offer or accept RWI in its bid in order to remain competitive. While historically RWI transactions often had a nexus to the United States or to private equity funds or financial investors, recently there has been a proliferation of RWI‑supported transactions in Canadian domestic transactions that have included strategic acquirors...