Warranty & Indemnity (W&I) insurance is an insurance product that has been developed specifically for the mergers and acquisitions (M&A) market. This type of product is sometimes referred to as Representations and Warranty (R&W) product cover, particularly in the US. W&I insurance provides cover for unidentified breaches of warranties or representations in a share or asset sale agreement.
The purpose of W&I insurance is to transfer the risk of any financial loss that may arise from a breach that arises from a share or asset sale agreement from the seller (or some other person or entity providing the warranty or representation) to the insurer or issuer of the W&I policy.
Who benefits from W&I insurance?
There are benefits to both buyers and sellers from having a W&I policy in place for M&A transactions. While a W&I policy may be purchased by either a buyer or seller this type of insurance appears to be gaining popularity with both groups.
Types of W&I policies
The majority of W&I insurance policies are what are known as ‘buy-side’ policies. This means that the buyer of the policy can make a claim on the insurance if there is found to be a breach by the seller of any incurred warranty or indemnity.
The alternative to a ‘buy-side’ policy is a ‘sell-side’ policy. A ‘sell-side’ policy provides indemnity as between the seller and the insurer which gives the seller coverage in circumstances where the purchaser makes a claim against the seller for an alleged breach of an insured warranty or indemnity. These types of policies are taken out by the seller and can be purchased even without the buyer being made aware of the policy.
How much do W&I policies cost and who pays for the policy?
There is no set fee for a W&I policy in Australia and the final fee will depend on both the particular insurer, the scale of any M&A transaction and the negotiations that have preceded the taking out of the policy. The premium (ie the cost) of a W&I policy can be paid for by either a buyer or seller and this cost is sometimes factored into price negotiations. As a general rule the fee for a policy will be in the order of 1% - 1.3% of the total of the insured risk.
Why should I consider purchasing a W&I policy?
There are a number of potential benefits to having a W&I policy in place for M&A transactions not the least of which is that it can be a valuable tool in solving potential roadblocks in negotiations on the question of allocation of risk which is usually the final negotiation point to be resolved between a seller and buyer.
Other relevant matters to take into consideration and factors in favour of taking out a W&I policy include the following:
What is not covered by a W&I policy?
Most W&I ‘sell-side’ policies will seek to exclude any loss suffered as a result of fraudulent conduct by the seller, so a seller planning on acting fraudulently should not assume that they can protect themselves from any possible liability by taking out a W&I policy.
While a buyer will be covered against the loss that would arise from fraudulent seller activity if they take out a ‘buy-side’ policy it is likely that such a policy will give the insurer the seller’s subrogated rights which would then enable the insurer to proceed against the seller directly.
W&I policies can have benefits for both buyers and sellers and we recommend you contact us to discuss your options before proceeding with any M&A transaction or purchasing any W&I policy.
If you or someone you know wants more information or needs help or advice, please contact us on (02) 9238 0060 or email firstname.lastname@example.org.