Our Approach to Transaction Solutions | Warranty & Indemnity Insurance | Tax Insurance
Warranty & Indemnity Insurance
Warranty & Indemnity (W&I) Insurance is an insurance product designed to protect parties in an M&A transaction from financial loss arising from breaches of warranties and certain indemnities given by a seller to a buyer under a sale and purchase agreement (SPA).
A buyer may replace the indemnity expected from the seller with insurance, or purchase cover that extends the period during which the buyer can make a claim and to a higher limit, above that offered by the seller (if any).
Sellers may also use this product to replace certain SPA obligations, allowing them to return sale proceeds to investors rather than tie up money in escrow, or retain the trailing risk of having to meet a warranty claim.
Uses of W&I Insurance
W&I insurance enables parties to an M&A transaction to pro-actively manage transaction risks. This brings with it a number of benefits, including a clean exit for sellers, peace of mind for buyers and facilitation of the negotiation process (thereby enhancing deal certainty).
Warranties are contractual statements in a SPA given by a seller regarding the condition and circumstances of the sale target at a given time, and the buyer enters into the SPA on the basis that such statements are true and accurate.
In a typical transaction without W&I insurance, where these statements turn out to be untrue or inaccurate and, as a result, the buyer suffers financial loss, the seller may be liable to pay damages as compensation for breaches of warranties.
With a W&I insurance policy in place, the insurer insures the buyer (or the seller) for loss resulting from such breaches. The risk of such financial loss arising is thus shifted to the insurer.
In addition to covering losses for breaches of warranties, W&I insurance may also provide cover for breaches of general indemnities and general tax indemnities, if these are also provided by the seller under the SPA.
Buyer’s Strategic Uses:
  • Recourse: coverage is extensive, including generous periods of coverage of up to 7 years (from closing) in respect of fundamental and tax warranties and up to 3 years in respect of business warranties.
  • Bid Differentiation: enhances and differentiates bids in auctions to help the buyer stand out and win the auction by offering the seller a clean exit.
  • Reputation: enables claims to be made confidentially (to the insurer directly rather than through litigation), allowing the buyer and seller to maintain their reputation.
  • Complex Sellers: provides additional financial security behind warranties where there are concerns about the collectability of claims under the SPA (such as disparate groups of sellers, potential dissolution of sellers after sale and/or distressed sellers).
  • Relationship: helps protect key relationships by allowing the buyer to claim under the W&I insurance policy instead of seeking recourse from their joint venture partner or management team.
Seller’s Strategic Uses:
  • Enhance Deal Certainty: the ability to transfer risk to a third- party insurance company eases the warranty negotiation process and provides the buyer with additional comfort over a key aspect of the transaction, thereby removing a key deal concern and enhancing deal certainty.
  • Optimise Sale Proceeds: where buyers are concerned about risks associated with the target, the ability to have unknown risks insured may enable sellers to maximise their value from a sale. W&I insurance may also remove the need for an escrow for breaches of warranties, thereby allowing sales proceeds to be distributed or reinvested as soon as possible.
  • Clean Exit: no recourse, holdback or escrow against sellers. The W&I insurance policy can also stand post-completion behind a seller who might refuse or not be able to provide warranties.
  • Negotiation Process: potentially shortens the negotiation period and simplifies the negotiation process.
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