Warranty & Indemnity Insurance

The Seller May Achieve a ”Clean Exit” and Lowered Opportunity Costs

A W&I insurance enables the seller to a clean exit, as the insurance provider overtakes the financial exposure of the seller’s warranty breaches. The buyer would direct any claim for warranty breaches under the SPA to the insurance provider instead of the seller. Full access to the proceeds from the divestment is gained through a one-time payment of the insurance premium for a multi-year policy period, and the W&I insurance can generally replace the need of an escrow. This may create an essential financial upside as the seller is able to invest the sales proceeds immediately upon completion of the transaction.

Enhancing a Bid and Increased Protection

The W&I insurance can be used by a buyer to make its bid more attractive to the seller. It further allows a buyer to extend the liability period and increase the liability “cap”, and accordingly increase the protection in the event of a warranty breach as insurance capacity may be available up to the full enterprise value (deal-dependent), if so desired.

Buyer Safeguards Relationships with Management

It is common that certain sellers of the target company form part of its management even after the transaction has completed. They may be key persons for the future success of the company, why it can be crucially important for the buyer to maintain the current management and key employees even after completion of the transaction. A W&I insurance can safeguard the relationship between such management personnel and the buyer, as potential breaches of the seller’s warranties are not directed to the retained management, but instead targeted at the external insurance provider.

The Transaction Process and SPA Negotiations are Facilitated

Negotiations are facilitated, as a balanced warranty catalogue may be achieved through a more collaborative approach by the seller and buyer. As the insurance provider stands the financial exposure of potential warranty breaches, it can assist in streamlining the discussions to the key areas of the transaction.

Eliminates Buyer’s Concerns Around the Seller’s Solvency

Potential concerns around the seller’s solvency can be eased, as insurance providers are of good financial stability, typically with an A-rating from Standard & Poor’s. Experienced claims handlers enable a structured and clear claims process from the notification of a potential loss of the buyer due to a warranty breach, to the final insurance payment. Financiers may also gain additional comfort as they can be beneficiaries of such payments.

The Buyer can Avoid Directing Claims to Several Sellers 

The buyer can avoid directing several claims to a scattered group of sellers, as potential claims are directed to a single insurance provider.