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Warranty and indemnity insurance: bridging the gap between the expectations of buyers and sellers

Warranty and indemnity insurance, commonly referred to as “W&I”, can be put in place to provide cover in relation to any breaches of the warranties or claims under the tax indemnities typically included in a sale and purchase agreement in relation to the shares of a company (an “SPA”). For all but the smallest mergers and acquisitions, this can prove a cost-effective means to free a seller from potential post-completion liabilities and secure them a cleaner exit. W&I also enables a buyer recover any loss it suffers as a result of a warranty breach or any tax liabilities where the seller is unwilling or unable to cover these amounts.

How does W&I work?

A W&I policy may cover either a buyer or seller, but a buyer policy is more common. Where buyers put this cover in place and suffer any loss insured under the policy, they will claim under the policy rather than against the seller. The limit on the seller’s liability for warranty and tax indemnity claims under the SPA is therefore typically reduced to a nominal sum of £1 in this situation. A higher limit (usually equal to all or a significant percentage of the purchase price under the SPA) will need to be agreed for other claims. Buyers may seek a contribution from the seller to the cost of the W&I cover to reflect the benefit which the seller is receiving from this reduced exposure to claims.

W&I will usually exclude certain types of loss from cover, or provide cover for certain warranties and indemnities on a qualified basis. Cover will also not generally be available for liabilities identified by buyers or their advisers during due diligence. Buyers should therefore try to exclude from any proposed £1 limit any warranty or tax indemnity claims for which they may not be able to obtain W&I cover, so that they do not lose their ability to recover in relation to these claims altogether.

How can we help you put W&I cover in place?

To get the ball rolling, we can brief insurance brokers with expertise in this area on your behalf and begin discussions with them about the cover required. They will subsequently issue a non-binding indication of the cover available from different underwriters and the different pricing options, depending for example on the policy limit and the financial threshold or excess for individual claims. Once you have agreed the level and scope of cover, the underwriters will issue a draft policy which we and your brokers will review and tighten up to conform with the cover you have selected and dovetail with the transaction documents.

What else is required to secure W&I?

The underwriters will want to see evidence that the buyer has carried out detailed financial, tax, commercial, legal and other appropriate due diligence in relation to the matters covered by the policy. They will also need to be comfortable that the seller and its advisers have, despite the £1 liability cap, tried to limit the warranties, gone through an appropriate exercise to identify and disclose anything inconsistent with these warranties and negotiated typical non-financial limitations on claims.

If there is a gap between signing and completion of the SPA, the insurers will insist on the warranties and this disclosure exercise being repeated at completion. The insurers will also expect the buyer to negotiate a right to walk away from the transaction if a material new matter is identified or disclosed between signing and completion, and will generally exclude from cover any matter which would give the buyer the right to terminate the SPA (whether or not the buyer wishes to do so).

Is W&I cover always appropriate?

We can help you consider in the context of each transaction whether W&I cover is likely to be appropriate. Factors which may weigh against putting W&I in place include: the cost of cover, the types of claims excluded from cover, the level of due diligence required to secure cover and the time it takes to secure cover. Brokers should be approached about these matters as early as possible in a transaction. Although cover can be put in place in as little as two weeks, the process of putting cover in place usually takes considerably longer than this.

For any more information please contact Jocelyn Ormond from our Corporate Team on: j.ormond@ashfords.co.uk.

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