Warranty and indemnity insurance, commonly known as W&I or R&W (Representation and Warranty), is a type of insurance created for merger and acquisition operations (M&A). It arises as an alternative to the traditional guarantees granted by the vendor in M&A operations, with the function of protecting the parties against the losses derived from the non-fulfilment of their obligations.
The type of cover usually taken out is for unknown risks, and often arises from the purchaser’s side for the purpose of claiming against the insurance company, based upon the policy, for the losses arising from non-fulfilment by the vendor party. Nevertheless, it is not unusual for the vendor party to take out the insurance, in order to protect itself against potential claims which may be formulated by the purchaser, so that in such cases, the vendor is entitled to make a claim under the policy with the insurer for the payment of the compensation claimed by the purchaser.
This insurance is more frequently taken out for large operations, wherein the value of the transaction exceeds 100 million Euros, and occurs during the initial phases of the process, however, it is also possible to take it out following the finalisation of the operation and also in operations of lesser amounts.
During the process of contracting the insurance, the insurance companies consult the documentation pertaining to the operation, including the due diligence reports, in order to subsequently negotiate the terms and conditions of the contract with the contracting party. This process usually takes between 15 to 25 days, with a possible reduction of the term for urgent cases.
The W&I insurance often excludes the cover of diverse aspects, which include, among others, the following:
- Known or disclosed risks
- Areas where due diligence is deemed to be insufficient
- Penalties not insurable by law
- Areas of environmental liability
- Future events
- Bribery and corruption
- Transfer pricing
Taking out a W&I insurance policy brings with it a series of advantages, both for the purchasers and the vendors, in the following aspects:
- A greater possibility and facility for the purchaser to recover losses generated by the non-fulfilment on the part of the vendor, by filing a claim with an insurance company, thus avoiding negotiations and disputes, and saving time and money.
- It grants greater reliability and makes the offer more attractive for possible investors, and vendors, especially those who are reluctant to provide traditional guarantees.
- The scrutiny of the operation by the insurer provides greater security in the operation, since it is capable of detecting possible risks or irregularities during the negotiation process.
- It facilitates the agreement by avoiding liability or indemnity negotiations, which can break the agreement or the relationship between the parties.
The greatest draw back may be seen to be the involvement of a third party in the process and the cost of the insurance policy.
With regard to cost, a typical amount for the premium depends on various factors, such as the number of possible claims, the duration of the policy, and the size and complexity of the operation, among others, likewise it will usually amount to between 1% and 1.8% of the policy limit.
Oscar Vilá
Vilá Abogados
For more information, please contact:
27th October 2023
