The world is fast-becoming a global village, especially in the realm of economic activities and transactions. This has brought about an increase in cross-border transactions which in turn has led to greater transactional risks. As businesses continue to seek acquisition opportunities beyond domestic borders, there’s a common challenge that keeps rearing its head. A large number of sellers are resistant to accepting significant, or sometimes any, liabilities for potential exposures that may exist prior to the closing of the transaction. This resistance compels buyers to turn to the insurance market for a protective covering.
Depending on the jurisdiction in question, such insurance can come in the form of representations and warranties (R&W) or warranty and indemnity (W&I) insurance. Both provide a level of assurance to the buyer about the state of the organization or asset they intend to acquire. These insurance policies can provide cover for breaches of contract that may come to light after the transaction has been completed, thereby reducing the financial risk associated with cross-border acquisitions.
According to a report by Goodwin on JD Supra, these insurance products are becoming increasingly important for businesses looking to grow and expand across borders.
The process of getting these insurances involves several steps. The buyer first identifies potential risks involved in the transaction. These risks could range from financial discrepancies to legal or operational exposures. The identified risks form the basis of the R&W or W&I insurance which covers any future liabilities associated with these exposures. The cost and premiums for such insurances vary depending on the size of the transaction, jurisdiction, industry and the perceived level of risk.
Taking out transactional risk insurance is especially pertinent in cross-border deals where laws, regulations and business practices may vary significantly. Despite the complexity and potential high costs, such insurance can provide a safety net for businesses making large investments in unknown territories.
In sum, as the global economy continues to evolve and become increasingly interconnected, so too does the level of risk in undertaking cross-border transactions. Though there are options for insurance coverage regarding these risks, it is crucial that buyer’s fully understand the specific cover they’re purchasing and carefully appraise the associated risks before finalizing cross-border transactions.