The who, what and why of W&I Insurance

What is W&I Insurance?

Warranty and Indemnity Insurance (W&I) transfers unknown risks associated with the sale of a business from the seller to the insurance market.

Without the presence of W&I on a transaction, the seller is typically expected to “stand behind” the warranties and (if relevant) general tax indemnity within the purchase agreement. The possibility of being held liable for a breach of warranty or a claim under an indemnity restricts sellers from benefitting from the proceeds of a sale, and achieving a “clean exit”. This also leaves buyers with uncertainty as to whether the seller has the means to pay for a claim should one arise after the transaction completes.

W&I Insurance replaces the seller’s liability under the purchase agreement, responding in the event of a breach of warranty or a claim under the general tax indemnity.

Who would benefit from W&I Insurance?

W&I Insurance benefits both the buyers and the sellers of a business. For buyers, it provides certainty that reliable A-rated capacity is available to them should they discover a claim after acquiring a company. For sellers, it reduces their exposure to financial risks associated with the sale by replacing their liability in the purchase agreement.

For both parties, the presence of W&I insurance eases commercial negotiations and relationships. In a scenario where management is remaining with a business after completion, the presence of W&I eliminates the need for uncomfortable negotiations in the event a warranty breach is discovered by the buyer.

Why should you buy W&I Insurance?

1. Protection against financial loss: W&I Insurance provides protection against financial losses caused by breaches of warranties or claims under indemnities. This helps to provide peace of mind for buyers and sellers, knowing that they are protected against potential claims by A-rated insurance capacity.
2. Enhances deal certainty: in providing a level of protection against unknown risks, W&I eliminates the need for drawn out negotiations over liability caps.
3. Improves commercial relationships: by removing the possibility of the buyer needing to negotiate a claim directly with the seller, the presence of insurance preserves the commercial relationship between the buyer and management sellers or a selling fund who may transact in future with the buyer.

Why is a good broker important?

When purchasing W&I Insurance, it’s important to partner with a broker who has experience in this area. W&I insurance is a bespoke product with a high number of variables (deal sector, jurisdiction, scope of warranties, scope of due diligence, quality or content of disclosures etc) which creates a number of opportunities to disrupt a process if handled incorrectly. It is important to partner with a broker with the bandwidth to give every transaction the level of attention required to facilitate a smooth process, and the experience to mitigate any potential roadblocks along the way.

Howden’s M&A insurance team is the largest and most active in EMEA, with 180 dedicated individuals from the world of insurance, corporate law, real estate, investment banking, tax, environmental engineering, litigation and insurance. We placed 1,400 policies in 2024 thus providing us with plenty of experience to draw from when advising clients on how best to fit W&I into a transaction and what constitutes market standard protection. Our advice includes supporting advisors when scoping due diligence, drafting the warranty suite, populating data rooms as well as insurer selection, policy parameters, policy drafting and negotiation. We also have a dedicated in house claims team comprising former insurance litigators who support clients throughout the lifecycle of a claim.

If you have any questions for our team, please contact us through the link provided below.