Corporate Update: W&I Insurance in M&A Transactions - Top Tips for Buyers and Sellers
04 September 2018
The use of warranty and indemnity (W&I) insurance in a transaction can help to more readily facilitate its completion and provide certain benefits for both the seller and buyer. We have included below some of the primary considerations when looking at using W&I insurance in a transaction.
What is W&I insurance?
W&I insurance is the generic name for insurance which provides for losses arising from a breach of warranty and/or, in certain cases, under an indemnity. The policy can be structured to indemnify either the warrantors (under a seller’s insurance policy), or the buyer (under the buyer’s insurance policy). This will depend on who is seeking the benefit of the policy. The trend more recently is for a buyer to obtain the W&I insurance.
When is W&I insurance used?
W&I insurance may not be required in every transaction. It is generally assessed on a case by case basis. W&I insurance is commonly used:
- In a bid situation where a bidder wishes to distinguish its bid from others
- Where there is a concern with the covenant strength of the warrantors
- Where a group of sellers are resisting warranty liability or are doing so on a several basis, and/ or
- Where a seller wishes to avoid holdbacks or guarantees in respect of potential warranty claims
What are the advantages of obtaining W&I insurance?
As the market for W&I insurance has become more competitive, and while every policy should be carefully considered, particularly the exclusions and conditions, policies which meet the objectives of the parties can more easily be realised. These policies can now usually be arranged within a short period of time. If structured properly, a W&I policy can give:
- The seller immediate access to the sale proceeds, a reduced period of risk and no requirement to leave funds in escrow
- The buyer a satisfactory level of recourse through an insurance policy with financially rated insurers
How much does W&I insurance cost?
Premiums for W&I policies will depend on the specifics of each transaction but are usually in the region of 0.9% to 1.5% of the insured limit of the policy purchased. Insurers will also usually require the insured to bear the first portion of any warranty claim by way of an excess or "retention". Recent trends have shown these excesses to be in the region of 0.5% to 1.5% of the policy coverage.
A seller may be agreeable to all or part of the premium for the W&I insurance being deducted from the purchase price but this is a matter for commercial discussion.
What is the process for obtaining W&I insurance?
The process of putting W&I Insurance in place typically takes between two to three weeks.
The steps involved in the process include engaging a broker, selecting an insurer and negotiating the policy terms with it. The insurer, through its own advisers, will also review the transaction documents.
Discussions will also usually take place between the insurer and the insured or their advisors. During these consultations, the underwriters will ask questions in order to get comfortable with the due diligence process, in the case of a buyer side policy, or the disclosure process on the seller side.
W&I insurance is becoming more common. Insurers are now also prepared to consider policies for more bespoke risks, over and above the risks covered by a standard policy. This should be borne in mind when considering liability risks around more technical issues in the relevant industry sector of the target in the transaction. Note the premium payable for any such policy would typically be higher.
We recommend the following tips to take into consideration when obtaining W&I insurance:
- Approach broker/ insurers early in the process
- The buyer should insist on managing the process and be clear with the seller on this
- Parties should invest time in the negotiation with the insurer as the better the information given to the insurer, the better the terms one will get
- It is advantageous to ensure the broker has a good knowledge about the deal and the sector
For more information and guidance on obtaining W&I insurance or other corporate aspects of M&A transactions, contact a member of our Corporate team.
The content of this article is provided for information purposes only and does not constitute legal or other advice.