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What is Warranty and Indemnity insurance?

Warranty and Indemnity (W&I) insurance is an insurance product designed to protect parties in a merger and acquisition (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.

Why is W&I insurance important?

W&I insurance enables parties in an M&A transaction to proactively 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.