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December 21, 2023

Representations and Warranties Insurance in Cross-Border Mergers And Acquisitions Deals

1. Introduction

Representations and Warranties Insurance (“R&W Insurance”) plays a crucial role in the realm of high-volume mergers and acquisitions, serving as an alternative mechanism that promotes flexibility, protection, and confidence between buyer and seller. 

R&W Insurance has been characterized as an alternative mechanism that enables the seller and the buyer to act with flexibility in mergers and acquisitions, providing protection and confidence to the parties. 

The use of R&W Insurance has been increasing rapidly in Europe and the United States, and in Turkey, with the expansion of international mergers and acquisitions, its domestic use and the incentivization of insurance companies in this direction have been on the domestic market in recent years.

Although R&W Insurance does not currently have a clear legal basis in Turkish insurance legislation, it is anticipated that insurance companies in Turkey will sporadically implement it, albeit in a limited capacity or under policy arrangements that include financial clauses.

2. Overview

R&W Insurance generally aims to provide coverage for damages resulting from breaches of representations and warranties in share transfer or asset transfer transactions agreements subject to integral to merger and acquisition deals. This insurance serves as an alternative means of compensation within the framework of insurance coverage.

Representations and warranties have been recognized as the most important contractual provisions in international mergers and acquisitions transactions. 

Thus, representations encompass factual statements pertaining to the financial and commercial aspects, activities, assets, and liabilities of the target company, while warranties denote the commitments made by transaction parties regarding the accuracy and veracity of the information contained in the transaction agreement. To mitigate risks arising from inaccuracies or violations of these representations and warranties, multiple compensation mechanisms are typically established within the agreement.

As a matter of fact, while the parties to the transaction rely on the results of the transaction within the framework of a commitment based on the representations and warranties set out in the agreement, compensation and indemnification mechanisms are also emphasized in order to protect against the risks that may arise in case of the misrepresentation or breach of such representations and warranties. 

R&W Insurance endeavors to alleviate the challenges associated with these mechanisms by introducing alternative protective arrangements in indemnification provisions. 

Consequently, with this type of insurance, the liability of the insured party (seller or buyer) to bear material damages resulting from false, inaccurate and misleading representations and warranties or their violation transfers to the insurance company. 

3. Qualifications of R&W Insurance Policy

a) Policy Party;

R&W Insurance policies can be issued by either the seller or buyer. 

In the sell-side policies, the aim is to absolve the liability of the seller towards the injured third-party buyer. In this type, the buyer would make an indemnity claim against the seller initially seeks indemnification from the seller for breaches of representations and warranties. If the current damage is covered by the insurance policy the buyer can then recourse the insurance company for the policy coverage unless there is willful misrepresentations and fraudulent behavior of the seller while giving the representations and warranties in the agreement.

On the other hand, buy-side policies currently constitute the vast majority of the R&W Insurance policies. This allows the buyer to directly seek compensation from the insurance company for material damages arising from the seller’s representations and warranties in the context of the transfer transaction.

b) Policy Coverage;

Coverage limits in deals are generally between 10%-%30 of the purchase price. In addition, larger coverage can be arranged on a case-by-case basis.

c) Exceptions of Policy Coverage;

In cross-border transactions, circumstances are easily changeable depending on the rights and obligations specified in transaction agreements and the legal systems of the parties involved. Therefore, to prevent unjust treatment in such transactions, the exclusions in cross-border transactions must be negotiated clearly and carefully. 

R&W Insurance policies generally provide a comprehensive coverage; however, at the same time exclusions are carved out for several times, including breaches that were known to certain individuals, fines and penalties, purchase price adjustments, forward-looking statements, and certain fundamental breaches of representations and warranties. Additionally, the policies may exclude policyholder-specific liabilities and risks, such as potential litigation discovered during the due diligence process.

4. Advantages of R&W Insurance

R&W Insurance enhances the position of parties involved in negotiations and the post-closing phase of transactions. By shifting the risk of compensating indemnities in cross-border transactions to third-party insurer, this insurance enables more successful and expedient realization of long-term risks and collection capabilities.

Buyers are increasingly drawn to R&W Insurance due to several factors. These include: 

  • the ability to determine upper indemnification caps in transaction agreements, 
  • extending the statute of limitations for indemnification through the policy, and
  • ensuring the ability to recover losses. 

R&W Insurance policies provide a valuable solution by covering material losses resulting from breaches of representations and warranties, particularly in mergers and acquisitions where the target company faces financial difficulties and the seller fails to provide adequate compensation for such breaches. These policies meet the commercial and financial risk expectations of the parties involved, offering alternative means to safeguard the policyholder’s financial position.

5. Implementation of R&W Insurance under Turkish Law

It is important to note that insurance law in Turkey is governed by the Insurance Law No. 5684 (“Law No. 5684”) and the Communiqué on Insurance Branches (“Communiqué”). 

Currently, there is no explicit regulation specifically addressing R&W Insurance in the Communiqué, and insurance activities require licensing in accordance with the legislation. Therefore, it is not legally feasible for insurance companies in Turkey to issue policies specifically labeled as R&W Insurance. Instead, such insurance policies are commonly referred to as liability insurance in practice. As a result, transaction parties often choose to arrange these policies through insurance companies operating outside of Turkey, as there is currently no existing local insurer directly offering the R&W Insurance in the Turkish insurance market.

6. Conclusion

R&W Insurance plays a crucial role as a management mechanism and an alternative compensation method for parties involved in mergers and acquisitions. 

While this type of insurance is increasingly prevalent worldwide, especially in the United States and the United Kingdom, it is expected that Turkish insurance companies will also start implementing this type of insurance, albeit rarely and in a limited manner, generally through policy arrangements that include financial clauses.

Best Regards,

Kılınç Law & Consulting – Department of Mergers and Acquisitions


Att. Sevinç JAFAROVA

Int. Att. Ecem ÖZBEK 


Sevinç Jafarova

Sevinç Jafarova