Warranty & Indemnity Insurance (Merger & Acquisition Insurance)

Are you about to merge with or acquire a business? 

Warranty and Indemnity Insurance, also known as Merger and Acquisition Insurance or Transactional Risk Insurance, is a policy that can enhance a deal, as well securitise risk of a merger and acquisition transaction. Warranty and Indemnity Insurance can protect either the buyer (buy-side policy) or a seller (sell-side policy) from financial loss that may arise in the event that there is a breach of the warranties and/ or indemnities given by the seller in the sale and purchase agreement (SPA) for the transaction. This can include potential tax liabilities.  

Benefits of Warranty & Indemnity insurance (Merger and Acquisition Insurance), are:  

  • Avoids potential litigation, to recover financial restitution for a breach of the warranties & indemnities.  
  • Bid enhancement, as the policy can negate the need for funds to be placed in escrow (or other form of security), to cover the contractual Warranties & Indemnities. This means that sellers can have immediate access to all sale funds.  
  • Can help facilitate improved finance terms.  
  • Provides comfort for seller, if the buyer requires a high level ‘maximum liability cap’ in the SPA; particularly if tax forms part of the Warranties & Indemnities.  
  • Clean exit and preserves relationships.  
  • Potentially removes deal-breaking risks from a transaction for both the buyer and the seller, by introducing an insurer, to bear some of those risks.  

Mergers and acquisitions inherently involve high-risk transactions, relying on businesses for full disclose across various facets, such as strategic plans, accounting & tax, partnerships, cyber landscape, supply chain integration, as well as operation intricacies and management methods. Every merger and acquisition is unique, however it is crucial for every merger and acquisition to have the protection and the confidence of comprehensive Warranty and Indemnity Insurance (Merger and Acquisition Insurance). 

For more information on the benefits of Warranty and Indemnity Insurance (Merger and Acquisition Insurance) please read our 4Sight Risk Partners article ‘What are the benefits of Merger and Acquisition Insurance?

Business this is recommended for:  

For all mergers and acquisitions over $5m (minimum premiums are $50,000), as well as Private Equity Businesses.  

Common Questions:

What is merger and acquisition insurance?

This is an insurance policy that mirrors the warranties & indemnities contained in a Buy Sell Agreement and protects both the vendor and purchaser against claims made against those warranties & indemnities.

What is W&I Insurance?

This is an insurance policy that mirrors the warranties & indemnities contained in a Buy Sell Agreement and protects both the vendor and purchaser against claims made against those warranties & indemnities.

Who normally pays for W&I insurance?

Either the vendor (Sell Side Policy) or the purchaser (Buy Side Policy) can take out the policy and pay the premium. The policy will reflect favourably on the purchaser of the policy.

Is W&I insurance worth it?

In the event of a claim, the purchaser can make a claim on an A rated insurer, rather than having to litigate against a vendor; who may no longer have the funds to pay a claim. So, there is a quick resolution to the disputed matter.

What are benefits of W&I?

Financial security in the event of a claim for the purchaser, clean exit for the vendor (close out Funds, without having to make provisions for potential liabilities/ claims, potential for improved deal terms (because of the security provided for the Warranties & Indemnities).

What are limits of W&I? 

The policy limit usually reflects the maximum claim in the Buy Sell Agreement; which is usually stated as a percentage of the purchase price of the acquisition. Tax is often the largest variable on the limit of the W&I Insurance; which is also reflected in the premium payable.

How much does W&I policy cost? 

The cost varies, depending upon the extent of due diligence completed, the terms of the Warranties & Indemnities (i.e. does it include tax), the diminimus and value/ percentage of the maximum claim in the Buy Sell Agreement. However, the usual minimum premium is $50,000.

What is the market trend in W&I insurance?

The Private Equity industry is a user of W&I Insurance in transactions, in order to be able to close off Investment Funds without having to provision for future potential claims.

What is the difference between M&A and W&I insurance?

These are the same types of policies & structures; just referenced differently.