Warranty and Indemnity insurance
Any deal is likely to include elements that are uncertain or uncomfortable. Warranties and Indemnity (W&I) insurance is a powerful tool to streamline negotiations between the parties, offering financial protection for unknown risks that lead to warranty breaches.
W&I can allow the seller to limit its liability to a low level, while also giving the buyers their desired protection. It covers breaching warranties or a claim under the tax covenant set out in the underlying acquisition agreement.
Every deal is different, so the insurance contracts must be bespoke; tailored to match the deal covenants precisely. We handcraft solutions to help you get your deals over the line, without the sleepless nights.
Who is W&I insurance for?
The buyer or seller. The seller will often introduce insurance to the deal but, in 9 out of 10 deals, the buyer is the policyholder. A buyer-side policy affords the buyer more control and comfort; they can claim directly from the insurer, with no need to involve the seller. The insurer will waive subrogation rights against the seller (barring seller fraud, of course).
W&I can also be used in place of escrow funds so that proceeds are distributed to investors immediately rather than tied up.
Many of the insurance underwriters we work with to secure Warranty and Indemnity insurance have a background in corporate law or investment banking. As a result, they are experts in business deals, buyer/seller relationships, and the due diligence and disclosure processes necessary for a successful deal. Therefore, our underwriting partners are confident in offering W&I to businesses with comprehensive processes and risk plans.
Policy limits are typically 10-20% of the deal value. The premium is usually a one-off payment of 2-3% of the policy limit - depending on factors including the jurisdiction of the acquisition agreement, nature, and location of the target's operations and policy parameters.
Key exclusions in W&I policy
The following are not covered under the terms of a standard W&I.
- Known, identified risks
- Transfer pricing
- Secondary tax liabilities
- Pensions underfunding
If you would like to discuss scenarios that include the above, please get in touch and speak to a specialist.