W&I insurance: minimising economic risk
Under a Warranty & Indemnity (W&I) insurance policy, insurers provide companies with protection against claims arising from breaches of warranty undertakings or tax indemnities given in company purchase agreements. Taking out W&I insurance can therefore minimise the buyer’s economic risk in the event of breaches of the warranties or tax indemnities provided for in the purchase agreement.
At the same time, the seller’s liability for warranty breaches is limited, usually to EUR 1.00. This enables the seller, particularly in private equity transactions, to achieve a so-called “clean exit”. Taking out W&I insurance is therefore generally advantageous for both sides of the transaction and can often help to significantly facilitate and accelerate negotiations.
Required by the seller
Typically, the insurance policy for W&I insurance is taken out by the buyer in a transaction. However, particularly in auction processes, it is often required and prepared by the seller side. This may include, for example, approaching the W&I insurance market at an early stage and instructing a W&I broker to prepare a so-called NBI report, which summarises offers obtained from insurers, known as Non-Binding Indications.
In any case, whether acting on the buyer or seller side, it is essential to keep the W&I insurance workstream in view from the outset, starting with the first planning steps of the transaction, and to involve experienced advisers throughout the process.
The more comprehensive the due diligence, the broader the insurance cover
It should be noted that, unlike contingent risk insurance, W&I insurance generally only covers unknown matters. However, this does not mean that due diligence reviews become less important, or even unnecessary, in transactions involving W&I insurance. Quite the opposite: the more thorough and comprehensive the due diligence review, the stronger the protection provided by the W&I insurance.
For the W&I insurer’s underwriting process, it is therefore crucial that the company acting as buyer and potential policyholder conducts careful due diligence as part of a disclosure process that is as comprehensive as possible, including the data room and disclosures. The minimum requirement of the W&I insurer is that the due diligence must be carried out at least to the same extent as it would have been in a transaction without W&I insurance.
Advantages of W&I insurance solutions
Seller
- Economically efficient: no need for escrow accounts or deferred purchase price structures
- Avoidance of potential conflicts after the transaction, particularly in cases involving retained shareholdings
- Transfer of risk to a third-party insurer without residual liability for the seller, enabling a “clean exit”
- Significant facilitation of SPA negotiations
- Optimisation of transaction value
Buyer
- Protection even where sellers are in financial difficulty
- Comprehensive warranties, including synthetic warranties
- Extended time limitations
- Increased liability caps
- High level of protection in the event of warranty breaches: W&I insurers eligible in Germany regularly have at least an S&P rating of A-
- Protection by the insurer even in cases of fraudulent and intentional non-disclosure by the seller
Advice on structuring W&I insurance
As a law firm with extensive expertise in W&I insurance, we have excellent relationships with leading W&I brokers, extensive experience in managing the structuring process through numerous successfully completed insurance policies, and a deep understanding of the market standards in this area. We are able to advise our clients at the highest level on all questions relating to insurance cover in the field of M&A transaction insurance.
Our experienced, Germany-wide W&I team within the Corporate Practice Area advises companies on the structuring, coordination and placement of W&I and contingent risk insurance.
Please feel free to contact us for further information on our services in the area of W&I insurance. Our main contact, Dr Marcel Leines, together with the entire W&I team, will be pleased to assist you and your company in minimising transaction risks and ensuring a successful and secure transaction process, including after completion.
