Warranties and Indemnities Insurance

Warranty & Indemnity (W&I) Insurance is a strategic risk management tool in M&A deals. It offers protection to both buyers and sellers by covering financial losses that may arise from breaches of representations and warranties, as well as certain indemnities specified in the SPA. Essentially, it transfers the risk from the parties directly involved in the transaction to an insurer, thereby facilitating smoother and more secure deals.

Rowlands & Hames’ preferred insurer is CFC, the MGA utilising Lloyd’s of London capacity, which has expertise in W&I insurance.

Under the terms of a typical M&A deal, sellers carry the risk for any liabilities which occurred while they owned the company. If these issues are discovered after the transaction completes and cause financial loss, the seller is often financially responsible.

This risk can be reduced by taking out a W&I insurance policy – Available to both buyers and sellers, W&I insurance is designed to reimburse the buyer for any financial loss suffered as a result of any inaccuracies in the representations and/or warranties given by the seller and to free up sale proceeds for the seller.

By transferring this risk to the insurer, W&I insurance can be used to:

• Enhance potential buyers’ bids by minimising the level of indemnification provided by the seller to the buyer
• Smooth the transaction process by simplifying the negotiation of the representations and warranties
• Reduce credit risk on the part of the buyer, since the buyer can claim against the insurer rather than any number of sellers
• W&I insurance is designed to reimburse the insured for any financial loss suffered as a result of inaccuracies in the representations and warranties.

Other forms of transaction liability insurance

Tax Indemnity insurance

Tax insurance exists to cover the acquired company, the seller or the buyer against the risk that an identified tax issue materializes and results in loss.

For more information on W&I/Transaction insurance please read CFC’s guide to Transaction Liability:

In the guide, you’ll learn:

1. Why does transaction liability insurance exist
   Under the terms of a typical M&A deal, sellers carry the risk for any liabilities which occurred while they owned the company. If these issues are discovered after the transaction completes and cause financial loss, the seller is often financially responsible.
2. What are representations, warranties and indemnities?
   Representations and warranties are statements of fact. In an M&A transaction, the seller will represent and warrant certain facts about the company which they are selling.
3. What happens when a representation or warranty is breached?
   When a representation or warranty is proven to be untrue, or breached, the seller will be liable for any losses suffered by the buyer as a result, which sometimes includes the diminished value of the acquired business.
4. How does a policy work?
   Transaction liability insurance steps in to address the reimbursement obligation. In the event a representation or warranty is inaccurate, the insured can make a claim against the policy rather than the other party.
5. Who should buy representations and warranties insurance?
   W&I insurance is generally available for private M&A transactions effected through stock (share) purchases, asset purchases and mergers.
6. Policies in action: Claims examples
   A couple of claims examples involving private equity firms acquiring a manufacturer and a restaurant franchise.

Policy limits and exclusions may apply, please see policy wording for full terms and conditions.