Warranty & Indemnity Insurance

We understand the complexities involved in mergers and acquisitions (‘M&A’) transactions. One of the key tools to manage risk and any potential future disputes arising from these transactions is Warranty & Indemnity (‘W&I’) insurance. This guide aims to provide a comprehensive overview of W&I insurance and claims, explaining what they are, why they are important, and how they can benefit both buyers and sellers in M&A transactions. 

What is warranty & indemnity (‘W&I’) insurance?

Warranty & indemnity insurance is a specialised type of insurance policy designed to protect against financial losses arising from breaches of warranties or indemnities (also known as ‘warranties and representations’ in the United States) given in a sale and purchase agreement (SPA) during an M&A transaction. W&I insurance can be taken out by either the buyer or the seller, although it is more commonly purchased by the buyer. 

Why W&I insurance is important 

1. Risk mitigation: W&I insurance transfers the risk of warranty breaches from the buyer or seller to the insurer, providing financial protection and peace of mind. 
2. Facilitates transactions: By providing a safety net, W&I insurance can help facilitate negotiations and expedite the completion of transactions. 
3. Protects relationships: It helps maintain positive relationships between buyers and sellers by reducing the potential for disputes over warranty breaches. 
4. Enhances bids: For buyers, offering W&I insurance can make their bid more attractive by reducing the seller's exposure to post-transaction claims. 

Types of W&I insurance 

There are two main types of W&I insurance policies: 

• Buyer-side policy: This policy protects the buyer against losses resulting from breaches of the seller's warranties or indemnities. It is the most common type of W&I insurance. 
• Seller-side policy: This policy protects the seller against claims made by the buyer for breaches of warranties or indemnities. It is less common but can be useful in certain situations, such as when the seller wants to distribute sale proceeds immediately without retaining funds for potential claims. 

Common claims under W&I insurance 

W&I insurance claims can arise from various breaches of warranties or indemnities, including: 

• Financial statements: Claims related to inaccuracies or misrepresentations in the financial statements of the target company. 
• Tax liabilities: Claims arising from undisclosed or unexpected tax liabilities. 
• Ongoing litigation: Claims related to undisclosed and unknown litigation, whether contemplated or ongoing, at the time of sale. 
• Compliance issues: Claims related to non-compliance with laws and regulations. 
• Intellectual property: Claims involving breaches of intellectual property warranties. 
• Employment matters: Claims related to employment contracts, benefits, or disputes. 

How W&I insurance works 

The process of obtaining and claiming W&I insurance typically involves the following steps: 

1. Policy placement: The buyer or seller works with an insurance broker to obtain a W&I insurance policy. This involves providing detailed information about the transaction and the target company to the insurer. 
2. Due diligence: The insurer conducts a thorough due diligence process to assess the risks associated with the transaction. This may involve reviewing the SPA, financial statements, and other relevant documents. 
3. Policy issuance: Once the due diligence is complete, the insurer issues the W&I insurance policy, outlining the coverage, exclusions, and terms. 
4. Claim notification: If a breach of warranty or indemnity is discovered post-transaction, the insured party notifies the insurer of the claim. 
5. Claim assessment: The insurer assesses the validity of the claim, which may involve further investigation and documentation. 
6. Claim settlement: If the claim is valid, the insurer compensates the insured party for the financial losses incurred, up to the policy limit. 

Challenges in W&I insurance claims 

While W&I insurance provides valuable protection, there can be challenges in making claims, including: 

• Policy exclusions: Certain risks may be excluded from coverage, such as known issues or specific high-risk areas identified during due diligence. 
• Claim validity: The insurer may dispute the validity of a claim, requiring the insured party to provide substantial evidence to support their case. 
• Time limits: W&I insurance policies often have strict time limits for notifying the insurer of a claim, which must be adhered to. 

How Freeths can help 

Our experienced team of solicitors specialises in handling W&I insurance and claims. We provide comprehensive legal support to help you navigate the complexities of W&I insurance and ensure that your interests are protected. 

Warranty & Indemnity insurance and claims are crucial for protecting your business in M&A transactions. At Freeths, we are committed to providing the legal expertise and support you need to navigate these complex issues.

Contact us today to learn more about how we can help safeguard and support your business against W&I risks and claims.