In the dynamic world of mergers and acquisitions (M&A), where risks and uncertainties often loom large, a powerful ally has emerged to help navigate the complex landscape—Warranty & Indemnity Insurance, commonly known as W&I Insurance.Over recent years, this specialized insurance product has gained significant traction in M&A transactions, revolutionizing how parties manage and mitigate potential pitfalls. In this article, we embark on a journey into the realm of W&I Insurance, exploring its fundamental principles, pivotal role in risk allocation, buyer and seller perspectives, and the intricate dance it performs with purchase agreements and due diligence.

Understanding W&I Insurance

W&I Insurance provides coverage for damages that may arise due to the breach of warranties and indemnities given in enterprise purchase agreements. These warranties represent statements of fact made by the seller about the target company’s condition at the time of the transaction. If these statements prove to be false or inaccurate, the buyer can suffer financial losses. W&I Insurance steps in to protect both the buyer and the seller from such losses.

The use of W&I Insurance has become more prevalent in M&A transactions for various reasons:

    • Risk Allocation: In cases where the transaction parties cannot agree on the distribution of risk, W&I Insurance serves as a neutral solution.
    • Limited Warranties: In some scenarios, sellers may offer limited warranties or impose low liability caps due to a strong negotiating position or a distressed M&A scenario. W&I Insurance can bridge this gap.
    • Clean Exit: When private equity-sponsored funds act as sellers, they often opt for a clean exit by transferring liability to the insurer.

Buyer-Side and Seller-Side Policies

W&I Insurance can be taken out by either the buyer or the seller, depending on the circumstances and negotiations.

Buyer-Side Insurance: Buyers often seek W&I Insurance when they want additional protection beyond what the seller offers in warranties. This policy ensures that the buyer can claim damages directly from the insurer in the event of a breach, without having to pursue legal action against the seller first.

Seller-Side Insurance: Sellers may choose to purchase W&I Insurance to limit their liability exposure post-transaction, especially if they consist of individuals or entities with limited financial means.

The Interplay Between W&I Insurance and the Purchase Agreement

W&I Insurance is closely intertwined with the provisions of the purchase agreement. Key aspects to consider include:

  1. Defining the Scope of Coverage:

The purchase agreement sets the stage by outlining the warranties and indemnities that the seller provides to the buyer. It’s crucial for both parties to understand that W&I Insurance does not operate in isolation. Instead, it complements the purchase agreement, covering specific warranties and indemnities identified in the policy. Therefore, a clear alignment between the purchase agreement’s provisions and the W&I Insurance policy is essential. Parties should work together to determine which warranties will be covered by insurance and which will remain the seller’s responsibility.

  1. Tailoring Warranties and Indemnities:

The presence of W&I Insurance can influence the shape and extent of warranties in the purchase agreement. For instance, sellers may be more willing to accept larger liability caps, lower deductibles, and longer limitation periods if they know that liability claims are primarily covered by W&I Insurance. Conversely, buyers may accept higher liability caps and deductibles from the seller if the insurer is willing to provide additional coverage beyond these limits. This interplay ensures that the purchase agreement’s terms align with the risk allocation facilitated by the insurance policy.

  1. Coverage Duration:

The purchase agreement specifies the period to which warranties apply. W&I Insurance typically does not cover forward-looking statements or risks that are challenging to assess. However, insurers may accept certain forward-looking statements if they relate to the transaction’s closing and fall within a specific timeframe. This underscores the importance of coordinating the issuance of a confirmation of cover with the seller’s bring-down certificate to avoid covering circumstances that become known between signing and closing.

  1. Limitation of Seller’s Liability:

In transactions covered by W&I Insurance, the seller’s liability is often limited to a symbolic liability cap, leaving the seller with minimal remaining liability risk. This arrangement decouples the sum insured by the insurer from the purchase agreement’s limit, which can be advantageous in managing risks and reducing seller exposure.

  1. Disclosure and Due Diligence:

Both the purchase agreement and W&I Insurance depend on the disclosure process. Sellers should provide comprehensive disclosures to prevent disputes, while buyers must conduct thorough due diligence to identify potential risks. The insurer’s assessment often considers the quality of due diligence and disclosure practices.

The Role of Due Diligence

Due diligence plays a pivotal role in the context of Warranty & Indemnity Insurance for M&A transactions. It is a comprehensive process that involves the systematic examination of a target company’s financial, legal, operational, and commercial aspects. The quality and depth of due diligence can significantly impact the availability, cost, and terms of W&I Insurance coverage.

Due diligence is the bedrock upon which W&I Insurance underwriters assess the risks associated with a transaction. Insurers rely on the findings of the due diligence process to evaluate the target company’s financial health, legal compliance, operational efficiency, and potential liabilities. A thorough and well-documented due diligence exercise provides insurers with the information they need to underwrite the policy effectively.

W&I Insurance is designed to cover unknown risks, and it typically excludes known risks or those that should have been discovered through due diligence. As a result, the due diligence process serves to identify and disclose any material issues or risks that are already known to the buyer. This ensures that the insurer is not exposed to liabilities that were within the buyer’s knowledge before the transaction.

The results of due diligence help parties involved in the transaction understand the target company’s specific risks and areas of concern. This information is instrumental in tailoring the W&I Insurance policy to provide coverage for the most relevant and material risks. Coverage terms, exclusions, and limitations can be adjusted based on the due diligence findings to align with the transaction’s unique characteristics.

Buyers can use the results of due diligence to strengthen their position during negotiations with sellers. If due diligence uncovers potential risks or issues, buyers may negotiate for more favourable terms, including adjustments to the purchase price, expanded representations and warranties, or additional indemnities. The presence of W&I Insurance can give buyers confidence to proceed with negotiations, knowing they have insurance coverage as a fallback.

For sellers, due diligence offers an opportunity to address potential deal-breakers before they become major obstacles. Sellers can proactively address issues identified during due diligence to reduce the likelihood of warranty claims after the transaction. This risk mitigation can positively impact the terms and cost of the W&I Insurance policy.

The due diligence process fosters transparency between the buyer and the seller. Sellers are encouraged to provide complete and accurate disclosures to avoid post-closing disputes. The quality of disclosures influences the insurer’s assessment of the transaction’s risk profile and can impact the policy’s terms and pricing.

In the event of a breach of warranty or indemnity, the due diligence documentation can serve as valuable evidence to support a claim under the W&I Insurance policy. It helps demonstrate that the issue was unforeseen and that the buyer conducted reasonable due diligence to assess the risk.

Factors Influencing W&I Insurance Costs

Several factors influence the cost of W&I Insurance:

    • Coverage Limit: The total coverage limit of the policy directly impacts the premium, with higher limits resulting in higher premiums.
    • Excess/Retention: The amount the buyer or seller is willing to bear before the policy comes into effect affects the cost. A higher excess/retention lowers the premium.
    • Transaction Complexity: Complex transactions or those involving multiple parties may lead to higher premiums.
    • Industry Sector: The industry sector and geographic risk can impact the rate offered by insurers.
    • Due Diligence Quality: A thorough due diligence process can influence the insurer’s perception of risk and, consequently, the premium.

Benefits of W&I Insurance

W&I Insurance provides an additional layer of protection beyond what is negotiated in the purchase agreement. This enhanced risk management helps buyers proceed with confidence in M&A deals, knowing that they have coverage for potential post-closing issues.

The presence of W&I Insurance can also enhance the buyer’s negotiating power. Buyers may be more willing to accept certain terms or pricing if they know they have insurance coverage for specific risks.

For sellers, W&I Insurance can offer a clean exit strategy. By transferring some liability to the insurer, sellers can reduce their exposure to post-closing disputes and indemnification claims.

In the event of a breach, W&I Insurance expedites the claims process, ensuring quicker resolution and compensation for losses. This can save both time and legal costs.

W&I Insurance has expanded its global reach, making it accessible for M&A deals in various regions. This globalization facilitates cross-border transactions and provides consistent risk management tools.

Offering W&I Insurance as part of a deal can make a transaction more attractive to potential buyers or sellers. It demonstrates a commitment to risk management and can lead to a smoother and more competitive M&A process.

Key Considerations

    • Scope of Coverage: Buyers and sellers must carefully assess the scope of coverage offered by W&I Insurance. This involves defining which warranties are included and excluded from the policy. Negotiations should aim to strike a balance between comprehensive coverage and acceptable exclusions.
    • Disclosure and Due Diligence: The disclosure process is critical for both buyers and sellers. Sellers should provide comprehensive disclosures to avoid disputes, while buyers should conduct thorough due diligence to identify potential risks. The insurer’s assessment often considers the quality of due diligence and disclosure.
    • Policy Period: Parties should agree on the duration of the policy period, which typically ranges from 12 to 36 months. This period is crucial, as it determines the timeframe during which claims can be made.
    • Excess and Deductibles: Excess or deductibles are the amounts that the buyer or seller must absorb before the policy responds to a claim. Careful consideration should be given to setting these amounts, as they can affect the overall cost of the insurance.
    • Claim Process: Parties should understand the claims process outlined in the policy. It’s essential to know the steps to follow in the event of a breach and how disputes will be resolved. Efficient communication and documentation are vital during the claims process.

W&I in the Central and Eastern Europe

W&I Insurance in the Central and Eastern European (CEE) region has experienced significant growth and transformation in recent years. Initially underutilized compared to other global markets, CEE lawyers and investors have increasingly recognized its benefits. This heightened awareness has led to a surge in the number of deals seeking insurance coverage. While the specifics of the W&I Insurance market vary from country to country within the CEE region, the overall investment climate has become more conducive to insuring both real estate and corporate transactions. The expansion of this insurance product has not only reduced risks for sellers but also provided enhanced protection for buyers, particularly when concerns arise about the financial stability of the seller or the target company. As CEE continues to attract both global and regional investors, the trend of utilizing W&I Insurance is expected to persist and evolve in response to market demands and increased competition, with the possibility of other liability products like tax, contingent liability, and environmental insurance gaining popularity in the future.


In conclusion, W&I Insurance is a valuable tool that facilitates M&A transactions by mitigating risks and providing financial protection to both buyers and sellers. Its flexibility, customization, and ability to streamline the claims process make it an integral part of modern M&A deals. Understanding the interplay between W&I Insurance and the purchase agreement, conducting comprehensive due diligence, and considering the factors affecting insurance costs are key to leveraging the benefits of this insurance product in M&A transactions.


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