Representation and Warranty Insurance RWI in healthcare provider deals what you need to know for year-end 2021
Representation and warranty insurance (RWI) has boomed in popularity in the highly-regulated world of healthcare provider deals, and many dealmakers assume it will continue to be available as we ride the current wave of deals seeking to close by year-end 2021. That assumption may be wrong.
In recent weeks, a number of insurance brokers have been sounding the alarm that severe capacity challenges in the RWI market could make healthcare provider deals the first on the chopping block as underwriters prioritize easier deals without the unique risks associated with healthcare provider transactions.
Dealmakers with a mandate to close by year-end should plan ahead and fast-track due diligence processes, in recognition that the headrush of coverage in 2019 and 2020 will not be available for many deals in the year-end surge of 2021.
History of RWI in Healthcare Provider Deals
RWI provides insurance as an alternative source of recovery for breach of a seller’s representations and warranties in an acquisition agreement. This allows the parties to substantially reduce — if not eliminate — indemnification escrows and protracted negotiations over an indemnity package.
To understand the anticipated changes in RWI coverage for healthcare provider deals, one must first look backwards and see how that coverage emerged in the first place.
Originally offered in the late 1990s, RWI slumbered for over a decade until it suddenly gained dominance in the late 2010s.According to one study, RWI grew from only 40 deals in 2008, to 1500+ deals in 2018.
RWI for healthcare deals, however, lagged the adoption rate seen in almost every other industry. In these transactions — and in particular, in healthcareprovidertransactions, as opposed to adjacent industries such as healthcare technology and life sciences — representations and warranties concerning billing and coding and compliance with the Stark law, anti-kickback laws and HIPAA are critical. Until three or four years ago, carriers would categorically exclude these representations from coverage, making RWI of little value for most deals in the sector.