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Warranty & Indemnity (W&I) Insurance: A detailed guide for buyers and sellers in unlisted company acquisitions

November 21, 2023

Our recent guide published by Practical Law provides an in-depth analysis of Warranty and Indemnity (W&I) insurance in the context of unlisted company and business acquisitions.
Financial, Executive and Professional Risks (FINEX)|Mergers and Acquisitions
Mergers and Acquisitions

Co-authored by a Nicholas Lunn, Head of Southern Europe, Liberty Global Transaction Solutions (GTS), and Alexander Keville, Head of M&A FINEX Global, WTW, the guide covers key insurance policy features, transactional processes, costs to be aware of and scenarios where W&I insurance can add value to a transaction.

Using the guide

This guide serves as a comprehensive resource for multiple stakeholders:

  1. Legal and Financial Advisors: To consult when structuring deals.
  2. Buyers and Sellers: To understand the scope, limitations, enhancements, processes, and costs and to gauge how W&I insurance can add value during the sale and purchase process.
  3. Risk Management Professionals: For a detailed analysis of risk transfer mechanisms.

Access the guide here*

*This article is only available to readers with a subscription to Practical Law

Summary of guide

W&I insurance is a strategic tool designed to mitigate financial risks arising from a breach of warranty in a Sale and Purchase Agreement (SPA) or certain other transaction documents. Predominantly used in share deals, it offers critical protection against potential financial losses associated with unknown or undisclosed matters. In the U.S., it's commonly known as Reps and Warranties insurance.

Types of policies

Originally conceived to provide sellers with financial peace of mind, sell-side policies protect against claims buyers may have under the warranties and tax indemnities within the SPA.

However, the more prevalent form of W&I insurance takes the form of a buy-side policy. This policy type provides an avenue for recourse when there's a discrepancy between the buyer's required level of contractual protection and what the seller is willing to provide. Insurers essentially step into the shoes of the seller in such instances and such policies can even provide cover in respect of seller fraud. Some buy-side policies are initiated by the sell-side and as the transaction progresses, subsequently “flip” to the buyer; this is often referred to as a “stapled” W&I insurance policy.

Whether a buy-side or a sell-side policy, the benefits of W&I insurance can often be felt by both parties to the underlying transaction; be that to provide an avenue for recourse, enhance the protections otherwise afforded, preserve commercial relationship, allow the sellers to walk away from residual liabilities, amongst various other reasons.

Costs and premiums

Premiums for buy-side W&I insurance typically depend on multiple factors such as the limit of liability sought, sector and jurisdiction(s) in which the target group operates, enhancements to coverage opted for and the size of policy retention selected. Other associated costs, such as insurance premium tax, underwriting fees and break fees are also to be considered.

Process and timing

The article explores the W&I insurance process in detail, which broadly follows the below:

  1. The risk is marketed and appetite for insuring the transaction and indicative policy terms are obtained and considered with the insured.
  2. Once an insurer is selected, professional adviser diligence reports are then reviewed, and questions are raised by the insurer to fill in gaps in their knowledge and understanding of the transaction.
  3. The W&I insurance policy is then drafted, WTW support the policy negotiations to help maximise coverage.

Typically taking approximately 15 business days from first instructions to inception of the policy, the process seeks to mirror the transaction timetable such that cover is in place from the signing of the SPA.

Conclusion

W&I insurance has become a staple in modern M&A transactions, especially in the world of private equity and acquisition of private companies. Offering a variety of advantages such as risk mitigation and financial security, it serves as a robust tool for both buyers and sellers. Due to its intricate nature, stakeholders should engage with experienced brokers and legal advisors to ensure a seamless transaction and adequate risk transfer.

By leveraging data analytics and industry expertise, WTW can help tailor W&I insurance policies to meet specific needs and negotiate better terms in SPAs, enhancing the overall transaction experience for all parties involved.

Access the guide here*

*This article is only available to readers with a subscription to Practical Law

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Mergers & Acquisitions, FINEX GB
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