Warranty and indemnity insurance

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

M&A insurance 

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
M&A insurance 
  • 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.

FAQs

Premiums are usually in the region of 0.75% - 1.5% of the policy limit with a minimum premium cost of circa £50k to £75k. The premium rates will depend on various factors such as the nature and jurisdiction of the target, governing law of the acquisition agreement and scope of warranties. The premium is a one-off payment, due at the start of the policy.

The process can be completed within one week. There are two stages to the process:

Stage one:
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)

Stage two:
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.

The average limit of insurance taken out in 2017 was 34% of the enterprise value (EV). However, there is variance for smaller deals, and the limit vs. EV percentage tends to decrease as deal size increases.

Insurers will expect to see comprehensive externally produced due diligence (DD) reports undertaken by the buyer’s external advisors (legal, financial and tax at a minimum). The DD exercise should encompass all areas covered by the warranties and in all jurisdictions being warranted.

The policy will match or extend the limitation period of the Transaction Documents (usually 2-3 years for general warranties and 7 years for fundamental and tax warranties).

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.

Key Stats

M&A Insurance M&A Insurance M&A Insurance M&A Insurance

WHY JLT

Warranty & Indemnity insurance 
  • 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
Warranty & Indemnity insurance 
  • 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.
Read our latest insights