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M&A Insurance: Warranty and Indemnity Insurance

Warranty and indemnity insurance, also known as representations and warranties insurance (“R&W Insurance”) within North America, is increasingly used as an alternative to traditional indemnification in M&A transactions globally. Warranty and indemnity insurance facilitates clean exits for sellers by eliminating escrows or contractual indemnities, and replacing them with an insurance policy. It also provides significant benefits to buyers, including longer periods of indemnification.

What is Warranty and Indemnity Insurance?

Warranty and indemnity Insurance is a specialist insurance product covering breaches of representations and warranties, and claims under indemnification provisions (including the tax indemnity/covenant), contained in sale and purchase agreements.

The insurance covers loss or liability arising from unknown or undisclosed matters and indemnities. The insurer effectively “steps into the shoes” of the party giving the contractual promises.

Each warranty and indemnity insurance policy is tailored to meet the specific needs of a transaction. Warranty and indemnity insurance is intended to work in parallel with the negotiations and is designed to support (rather than replace) a robust due diligence process.

A warranty and indemnity policy is a non-renewable, single premium product with the premium being paid upon completion of the transaction.

Who should buy warranty and indemnity insurance?

Warranty and indemnity insurance can be purchased by either a buyer or a seller.

The need for warranty and indemnity insurance arises when the amount or quality of recourse that the seller is willing, or able, to offer is insufficient to the buyer.

Different expectations regarding contractual liability can be a serious barrier to an effective transaction. Warranty and indemnity Insurance can provide a solution that satisfies both parties’ expectations.

Buyer-side policy

Over 95% of the warranty and indemnity Insurance policies placed by Willis Towers Watson are buyer-side policies.

A buyer-side warranty and indemnity insurance policy offers two key advantages over a seller-side policy:

  • the buyer can claim directly against the insurer (i.e., without having to pursue recourse against the seller(s) or warrantor(s), enabling a clean exit for the seller(s));
  • a buyer-side policy will also provide indemnification in respect of any fraudulent breaches by the seller(s).

“Stapling” Warranty and Indemnity Insurance (seller-side to buyer-side “flip”)

Buyer-side policies are often initiated by a seller who either suggests or insists that the buyer enters into the policy as the insured, facilitating a clean exit. This process is often referred to as “stapling” warranty and indemnity insurance to the transaction.

Seller-side policy

This protects the seller(s) (plus any guarantor or other warrantors, if applicable), from claims by the buyer for breach of representation or warranty, or under the tax indemnity/covenant, enabling the seller to ring-fence the risks associated with the sale. It also avoids the need to claw-back proceeds to satisfy indemnification claims.

End of Fund Life Insurance

An End of Fund Life policy insures residual liabilities arising from the fund’s investment activities, enabling the fund to close and distribute final proceeds to investors.

The use of an End of Fund Life policy is a strategic tool for fund managers to maximise return, ensuring cleaner exits, reducing fund administration costs and ultimately allowing a more efficient final distribution.

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