The Impact of Accounting Estimates on Representations and Warranties Insurance Underwriting and Claims

William (Bill) Marquardt, Frank Dery, and Kenneth Mathieu highlight the growing use of representations and warranties insurance (RWI) as a risk-mitigation strategy in private mergers and acquisitions (M&A) transactions, emphasizing the need to evaluate management’s financial statement representations with a particular focus on accounting estimates.

The authors evaluate the prevalence and impact of accounting estimates on the frequency and severity of RWI claims. They discuss case studies that demonstrate the risks associated with failing to identify and evaluate common red flags associated with accounting estimates, both during the underwriting process and when evaluating and quantifying a loss claim. They also review risks associated with occupational fraud and misrepresentations, which can increase RWI underwriting during the due diligence process.