What is warranty and indemnity insurance?
Warranty and indemnity insurance, commonly referred to as W&I insurance, is an insurance solution used primarily in mergers and acquisitions transactions. It protects the buyer, the seller, or both parties against financial losses resulting from a breach of warranties or indemnities given under a share purchase agreement, asset purchase agreement or similar transaction documentation.
In an M&A transaction, the seller usually makes contractual statements concerning the target company or the assets being sold. These warranties may concern, for example, ownership of shares, title to assets, financial statements, tax matters, material contracts, employment issues, intellectual property rights, permits, compliance, litigation or environmental liabilities. If a warranty proves to be inaccurate and the buyer suffers a loss, the seller may be required to compensate the buyer under the transaction agreement.
W&I insurance may transfer part of this contractual risk from the transaction parties to an insurer. Depending on the policy structure, the insurer may compensate the insured party for covered losses that arise from a breach of warranties or a qualifying indemnity. The policy does not replace the sale and purchase agreement. Instead, it operates alongside it and must be aligned with the agreed allocation of risks.
How does W&I insurance work in M&A transactions?
A W&I policy is usually arranged during the transaction process. The insurer reviews the transaction documentation and the due diligence materials prepared for the buyer. The purpose of this review is to assess the risks associated with the target business and to identify matters that should be excluded from insurance cover or addressed separately in the transaction documents.
Buyer-side policies are commonly used in private M&A transactions. Under this model, the buyer is the insured party and may submit a claim directly to the insurer if it discovers a covered breach after completion. This structure can reduce the buyer’s need to pursue the seller and may allow the seller to receive a larger portion of the sale price at closing.
Seller-side policies are also possible. In that case, the seller is insured against its liability towards the buyer for covered warranty claims. The practical consequences of each structure differ, particularly in relation to claims handling, recoveries and the seller’s continuing exposure following completion.
The scope of cover depends on the policy wording, the transaction documents and the insurer’s underwriting process. Insurers commonly exclude known issues, matters identified in due diligence, forward-looking statements, purchase price adjustments, certain transfer pricing exposures, fraud by the insured party and risks that cannot be assessed on the available information. Tax, environmental, litigation or regulatory risks may require separate insurance solutions or specific contractual protection.
When is warranty and indemnity insurance worth considering?
W&I insurance may be relevant where the seller seeks a clean exit from the business, including in transactions involving private equity funds, founders, financial investors, management teams or corporate groups undergoing restructuring. It can also be useful where several sellers would otherwise remain liable after closing, making post-transaction claims difficult to manage.
For a buyer, W&I insurance may strengthen the practical value of warranty protection where the seller’s financial capacity is limited or where the seller will be dissolved, liquidated or distributed shortly after the transaction. It can also help parties agree on a lower contractual liability cap or a shorter seller liability period, subject to the policy terms.
For sellers, insurance may reduce the need to retain a substantial part of the purchase price in escrow or to provide extensive security for warranty claims. However, it does not automatically eliminate all seller liability. The sale and purchase agreement may preserve liability for fraud, deliberate concealment, specific indemnities or excluded matters. The final position must be assessed against the transaction documents and the policy.
Early legal and insurance analysis is important. A policy that is considered only at the final stage of negotiations may not properly reflect the due diligence findings, the warranty package or the agreed claims procedure. Timely advice can help avoid uninsured gaps, inconsistent contractual provisions, disputes over disclosure and unexpected financial exposure after closing.
Legal support in relation to W&I insurance includes in particular:
- advising on whether W&I insurance is suitable for a proposed transaction;
- reviewing warranty, indemnity and disclosure provisions in transaction documents;
- supporting the preparation and review of due diligence materials;
- identifying risks that may be excluded from insurance cover;
- negotiating the interaction between the W&I policy and the share purchase agreement;
- advising on escrow arrangements, liability caps and claims procedures;
- assisting with post-closing warranty and insurance claims.
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