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- Why is Warranty and Indemnity Insurance important for M&A transactions?
Warranty and Indemnity (W&I) insurance helps bridge the gap between buyers and sellers in a share or business sale by providing coverage for losses arising from a breach of warranty, indemnity, or tax covenant in the purchase agreement.
W&I insurance is an increasingly cost effective and thus popular tool in M&A transactions. Birketts works with a number of brokers, such as Lockton, to assist clients to obtain the most appropriate policy for their needs, and to ensure that the terms of the policy are suitably reflected in the transaction documents. Historically, W&I insurance was an expensive product relevant only to larger transactions, in particular involving PE and VC sellers, and with limited appeal to individual sellers and transactions in the SME space. However, as one of the leading brokers in this field, Lockton, has highlighted in its end of 2022 market update, the underwriting insurance market continues to expand in response to increasing demand. With a total of 35 insurers now offering transactional risk insurance products, and with that greater capacity, and greater experience in the market, premiums and deal costs have reduced, and insurers are willing to insure a much wider range of transactions and risks.
Buy-side
Under a “buy-side” policy (taken out by the buyer), the W&I insurers effectively step into the shoes of the seller with the intention of providing, as far as possible, back-to-back cover with the liabilities of the seller agreed in the purchase agreement. The buyer can then make its claim for breaches of warranties etc. directly against the insurer, instead of bringing its claim against the seller. This gives the buyer comfort that it has recourse against the deep pockets of the insurer, rather than having to pursue a seller who may have no financial standing or have left the jurisdiction, and avoids often-difficult requests for the seller to leave funds behind either as deferred payments or in escrow, as security for potential claims. Where the seller has a continuing relationship with the business or the buyer post sale, the ability for the buyer to recover from the insurer, instead of from the seller, can be vital in maintaining that relationship. It is not uncommon for sellers (particularly institutional sellers such as PE, VC or trustee sellers) to require their buyer to purchase a “buy-side” policy (sometimes at the cost of the sellers), so that the insurer has liability for breaches of warranty etc. in the purchase agreement in place of the sellers, and the sellers know that they can use the sale proceeds without the risk of a claim being made against them.
Sell-side
“Sell-side” policies (taken out by the seller) are far less common, and they provide that the buyer brings its claim against the seller for any breach of warranty etc. in the purchase agreement, ensuring the seller then has the right to seek recovery from the insurer to recover the sums paid out. The advantage therefore of a “sell-side” policy, is that the seller knows that if it has to make a payment out to the buyer to settle a claim, it will be able to seek reimbursem*nt after the event, from the insurer.
If you would like to discuss how W&I insurance might be relevant in the context of a proposed sale or purchase you are contemplating, or if you would like an introduction to a broker with expertise in this area, please speak to Alice Wooler or your usual Birketts contact.
Alice Wooler
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at January 2023.
FAQs
Warranty and indemnity (W&I) insurance provides cover for losses arising from a breach of a warranty and claims under a tax indemnity (and, in certain cases, other equivalent provisions) in connection with a corporate merger or acquisition (M&A) transaction.
What is the purpose of warranty and 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).
What is warranty and indemnity in M&A? ›
Warranty and Indemnity (W&I) insurance helps bridge the gap between buyers and sellers in a share or business sale by providing coverage for losses arising from a breach of warranty, indemnity, or tax covenant in the purchase agreement.
Why is indemnity and insurance important? ›
Professional indemnity insurance protects you against claims for loss or damage made by clients or third parties as a result of the impact of negligent services you provided or negligent advice you offered. Compensation claims can be brought against you even if you provided a service or offered advice for free.
What is W&I insurance for M&A? ›
Warranty and indemnity insurance is a specialist insurance product covering breaches of representations and warranties, and claims under indemnification provisions (including the tax indemnity/covenant), contained in sale and purchase agreements.
What is the importance of indemnity and guarantee? ›
In a guarantee, the guarantor promises to fulfill the obligations of the principal debtor if they fail to do so. Protection: Both indemnity and guarantee offer protection. Indemnity protects against losses, while a guarantee protects against a failure to fulfill an obligation.
What is M&A insurance? ›
What is Mergers & Acquisitions Insurance? M&A Insurance - or Transactional Risk Insurance - is a set of protections designed to help both buyers and sellers mitigate risk and facilitate the closing of a deal.
What is indemnification in M&A transactions? ›
Indemnification is also known as a “hold harmless” clause, because one party will hold harmless the other for certain events. The justification for indemnification usually arises from the idea that certain events (and damages) result from factors under control of the Indemnifying Party.
What are representations and warranties in M&A transactions? ›
A representation is an assertion of past or existing fact given by one party to induce another party to enter into an agreement. A warranty is a promise that the assertion of existing fact or future facts are or will be true, along with an implied promise of indemnity if the assertion is false.
What is rep and warranty insurance in M&A? ›
Reps and warranty insurance: What is it? Reps and warranties are a contract between the buyer (or the seller) and an insurance company whereby the insurance company will indemnify the buyer for loss resulting from a breach of reps and warrants.
Indemnity agreements, also known as indemnity clauses, play an integral role in contracts. That's because they are designed to punish the nonperforming party and reassure the damaged one they will be reimbursed for losses caused by the errant entity.
What is the principle of indemnity and why is it important? ›
What is Principle of Indemnity? The principle of indemnity governs that an insurance contract compensates you for any damage, loss or injury caused only to the extent of the loss incurred. Insurance contract ensures that the insurer does not make a profit in the event of an incurred loss.
Why is indemnity needed? ›
This provides financial protection to cover costs in the event of negligence, mistakes, accidents, or some unavoidable circ*mstances that could highly impact the flow of the business. Indemnity insurance is one way to be protected against claims or lawsuits.
What is warranties and indemnity in M&A? ›
A warranty is a contractual statement made by the seller(s) regarding the state of the target company or business. An indemnity is a promise made by the seller(s) that they will reimburse the buyer for a specific liability, if the need ever arises.
Who pays for W&I insurance? ›
W&I policies can be taken out by the buyer and/or seller on a deal. ∎ In a buyer side policy, the insurance is taken out by the buyer so that it can claim directly against the insurer for loss flowing from a breach of warranty by the seller.
What is the difference between R&W and W&I insurance? ›
Depending on the jurisdiction, such insurance may come as representations and warranties (R&W) or warranty and indemnity (W&I) insurance. Although they serve the same basic purpose — coverage for unknown historical issues — their pricing, underwriting process, and scope of coverage are markedly different.
What is the use of indemnity insurance? ›
Indemnity insurance protects against claims arising from possible negligence or failure to perform that result in a client's financial loss or legal entanglement. A client who suffers a loss can file a civil claim.
What is the purpose of an indemnity plan? ›
What's an indemnity plan? Indemnity insurance helps pay medical bills. You may cover some costs yourself first (deductible). After that, you'll share some of the costs with the insurance company (co-insurance).
What does protection and indemnity insurance cover? ›
Protection and Indemnity (P&I) is a type of insurance that shipowners purchase to cover the potentially huge costs of any harm they accidentally cause to people, property and the environment.
