M&A Transaction- thinking of Warranty & Indemnity Insurance?

If there is a risk, there is insurance…

If there is a risk, there is often insurance out there willing to take on that risk by providing a policy of insurance. It has now become quite noticeable that Warranty and Indemnity Insurance (W&I Insurance) has broken into the M&A market as well.

 What is W&I Insurance?

 W&I Insurance is a product offered by certain, often niche, underwriters to either buyers or sellers in corporate transactions. Frequently, subject to the terms of the policy, the buyer will have a claim against the underwriter for a breach of a warranty contained within the contract rather than the seller. 

On the face of it, this can seem like an ideal scenario for both buyer and seller. 

The seller is able to walk away from the deal on completion and in the event of a warranty claim

The buyer is not caught up in negotiation and potential litigation with the seller for recovery, due to breach of warranty. 

 W&I Insurance points to consider

W&I Insurance should not be seen as an answer to all warranty and indemnity issues that may arise during the course of negotiating a transaction. 

Often the underwriter of any W&I Insurance policy will want to have:

• a full understanding of the target company
• familiarise itself with any due diligence
• have the benefit of a comprehensive disclosure letter prepared by the seller. 

Different underwriters will no doubt take different approaches, but this is also then likely to be reflected in the premium for any policy that may be offered.

As seen above, W&I Insurance does not, therefore, mean that warranties and indemnities do not have to be negotiated, or that a reduced diligence exercise can be undertaken. In fact, from experience, the requirements of the underwriter often lead to an enhanced due diligence process being required.

When taking out W&I Insurance it is important to consider the effect of any policy excess and whether this will in effect raise any minimal thresholds contained within the contract.

W&I insurers may also have specific conditions contained within their policy relating to deemed knowledge of the insured, disclosure and control of claims. All of this must be carefully considered and negotiated to ensure that the insurance policy does not either:

• contradict, or 
• make any claim more onerous than it was intended to be under the contract containing the warranties and indemnities.

It may well be the case that negotiations become tripartite between the seller, buyer and Insurer, this may, of course, lead to an increase in costs for the parties.

There is no set rule as to who pays for the insurance, however, if a seller requires insurance, they are likely to pay for it themselves. Whilst insurance in favour of a buyer is a negotiation for the parties. If the seller wants a clean break and does not want to suffer the risk of a claim being made against them, post-completion, the buyer would need the seller to fund the cost of any W&I Insurance premium.

 When to sue W&I Insurance

There is no set example of a transaction that would be suitable for W&I Insurance and underwriters would no doubt consider offering a policy for most M&A transactions. Historically W&I Insurance had been mainly used in Private Equity Transactions. 

Notably, it would be likely in those scenarios that the Private Equity house would want certainty, either in respect of:

• retaining the sale proceeds that it is receiving, or;
• able to successfully claim in the event of a breach of warranty. Similarly, Private Equity houses would likely not have had an active role in the management of the company thus affecting their ability to provide comprehensive warranties.
• W&I Insurance is now finding its way into transactions that do not involve Private Equity houses. 

From a buyer's perspective; if you are aware the seller is emigrating post-sale, or there are a number of different shareholders, W&I Insurance is seen as an appropriate safety net.

If you are looking to buy or sell a business and would like assistance either relating to the process in general or W&I Insurance specifically, please contact Tim Field at Birkett Long on 01206 217366.