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Mergers & Acquisitions

A deep understanding of organisations, their people,
culture and risk profile.

Warranty and Indemnity Insurance

What is M&A Warranty and indemnity Insurance?

M&A Warranty and indemnity (W&I) insurance (known in the US as Representation and Warranty or ‘R&W’ insurance) is a specialist insurance product designed to cover breaches of representations, warranties or certain indemnities (including the tax covenant) given in the sale of a business.

The insurance protection covers loss or liability arising from unknown or undisclosed matters and provides indemnity for financial loss. The insurer effectively ‘steps into the shoes’ of the person giving the contractual promises with the intention of providing cover with that agreed under the purchase agreement.

Each M&A W&I insurance policy is tailored to meet the specific needs of a transaction. W&I insurance is intended to work in parallel with the negotiation and is designed to support (rather than replace) a robust due diligence process.

A W&I policy is a non-renewable, single premium product with the premium being paid upon completion of the transaction.

Who should buy M&A W&I Insurance?

W&I insurance can be purchased by either a buyer or a seller.

The need for W&I insurance arises particularly where there the level and quality of financial recourse that is required by a buyer is higher than the level or quality of financial recourse that the seller is either able or willing to offer.

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

Buyer-side policy

Over 95% of the W&I policies Willis Towers Watson placed in 2016 were buyer-side policies.

This covers the buyer against the seller’s misrepresentations, both innocent and fraudulent. It offers two key perceived advantages over a seller-side policy:

  • The buyer can claim directly against the insurer (ie without having to pursue recourse against the seller or warrantor(s))
  • A buyer-side policy will also provide indemnification in respect of any seller fraud.

‘Stapling’ M&A W&I insurance (Seller-side to buyer-side “flip”)

Buyer-side policies are often instigated by a seller who either suggests or insists that the buyer enters into a W&I buyer-side policy. This process is often referred to as ‘stapling’ W&I Insurance to the transaction.

Seller-side policy

This offers liability protection to the seller (plus any guarantor or other warrantor(s), if applicable) for innocent misrepresentations in M&A transaction documents.

The seller-side policy covers claims from the buyer for breach of warranty or a claim under the tax covenant, enabling a seller to ring-fence the risks associated with the disposal.

End of fund life

End of fund life is a type of tailor-made sell-side W&I policy that can be used to indemnify the fund wrap-up of residual liabilities. It allows for any funds flowing from the transaction to be retained by vendors with little to no ‘tail of liability’, and in most circumstances without escrow terms that might have otherwise applied (ie until residual or contingent liabilities have expired).

This use of sell-side W&I is a useful and strategic tool for fund managers to maximise return, ensuring cleaner exits, more efficient final distribution and promoting faster payments.

For further details please see our End of Fund Life overview.

Use in real estate transactions

W&I Insurance is a strategic tool that has become a commonplace in the context of M&A deals (typically involving private equity or institutional investors) in the real estate sector.

In addition to pure real estate deals – such as office blocks and large property portfolios – W&I insurance can also be used in transactions where there is an operating business associated with valuable underlying real estate assets.

UK-style vs US-style coverage

There are fundamental differences between the style and approach of a UK-style W&I insurance policy and a US-style Reps and Warranties insurance policy.

Complementary M&A insurance and advisory solutions

Willis Towers Watson can also assist on broad range of complementary M&A insurance solutions and advisory services.