Warranty and indemnity (W&I) policies are used to give protection against financial losses suffered as a result of an unexpected breach of warranty or claim under a tax indemnity in a sale and purchase agreement (SPA) or tax deed (transaction documents).
W&I insurance remove significant obstacles and risks to closing a M&A deal in several ways. It mitigates the risk where the buyer has concerns over the financial stability of a seller, allowing them to rely instead on the insurers’ security.
It also allows a buyer to protect an on-going business relationship with management sellers who are staying with the business post-closing. It can also transfer a risk identified during due diligence - such as a potential tax liability which neither party are willing to shoulder, to the insurance market.
W&I insurance has been growing in use over the past decade as a strategic way of transferring risk on a transaction. Sellers now have record levels of capital at their disposal, leading to an increase in auction sale processes where the seller requires the buyer to purchase W&I in lieu of indemnity protection.
There has also been a rise in nil recourse deals, particularly within the real estate sector. In such scenarios, the seller desires a clean exit enabling return of funds to investors and the buyer must rely on the insurer’s security.
WHAT WE DO
We find the key motives driving out clients to purchase W&I insurance include:
Seller needs or desires a clean exit and materially restricts the buyer’s recourse under the SPA
Distressed seller looking to immediately realise sale proceeds, there is no-one to provide warranties or where the buyer has concerns over the financial stability of a seller
Seller wants balance sheet protection post completion or an alternative to escrow
SPA limitation periods are insufficient for a buyer
Buyer needs to differentiate their bid in an auction process
To satisfy lending or shareholder governance requirements
Parties are unable to come to an agreement using traditional methods of negotiation
Buyer wants to avoid the need to pursue claims against their new management team.
We can help place your warranty and indemnity insurance. Our teams experienced insurance professionals and corporate and tax lawyers, with former W&I underwriting experience are there to help you every step of the way.
How long does it take to buy W&I insurance?
The process can be completed within one week. There are two stages to the process:
Our M&A team will seek non-binding terms from insurers. This will take 2-3 working days. In order to do this we will require:
The most recent draft of the sale and purchase agreement (SPA)
Background information on the target and an overview of the transaction
The accounts of the target (if available)
An insurer will be engaged to undertake full underwriting. Some insurers may charge a fee at this stage. However, this will often be waived in the event the insurance is purchased. This will take approximately 5 working days. The insurer will require:
Access to the data room
Up to date versions of the SPA and disclosure letter
Access to the Buyer’s due diligence (if it is a buyer’s policy)
A short underwriting call with the deal team
During this stage the Insurer will issue a bespoke policy which will be negotiated.
What are the key inclusions and exclusions?
The measure of damages in the policy will usually match the sale and purchase agreement (SPA) and the duration of cover will mirror the agreed limitation periods (unless the policy is used by a buyer to extend the period of protection).
Insurance does not replace the need for a thorough deal process. Insurers expect robust negotiation of warranties, good disclosure and sensible due diligence (DD).
W&I insurance will usually exclude matters that are known to the insured, including matters disclosed by the seller or within DD reports. Forward looking statements (including projections, forecasts and collectability of debts), certain fines and penalties, pension underfunding and post completion purchase price adjustments. In some circumstances insurers may exclude certain warranties and/or apply other policy exclusions (e.g. transfer pricing). This will depend on the insurer and the underlying transaction.
Our M&A team combines experienced insurance professionals and corporate tax lawyers with former W&I underwriting experience
JLT gives you a tenacious and highly experienced global team that are used to working at the speed of the deal 24/7
Our coverage experts continue to rigorously test our products and exclusive JLT wordings. We consider both the coverage and claims perspective and our claims team play an active role prior to binding policy wordings to ensure that you get the broadest protection available
We involve our dedicated claims management experts at the outset for their insights when designing insurance programmes. We use their expertise to avoid any ambiguities in the wording and we work with markets that are claims responsive
We will speak to you in a language you will understand and we will explain any complexities so that you know exactly what service you are getting and what you are covered for. We can explain the particulars of your cover in a clear and concise way for your peace of mind.