One of the more interesting aspects of any M&A transaction is seeking to close the gap on the allocation of risk between a seller and a buyer. Typically, in a share or asset purchase agreement, a buyer will want the warranties to be as far-reaching and broadly drafted as possible whilst a seller will seek to limit the scope of the warranty language so as to reduce the likelihood, and financial consequences, of a warranty claim. The warranty and indemnity ("W&I") insurance market which seeks to bridge this gap has become increasingly popular in the Irish M&A marketplace in recent years with the proportion of parties opting to employ W&I insurance steadily increasing.
W&I insurance has the advantage of benefiting both parties to a M&A transaction by allowing for any potential liability arising out of a breach of warranty and/or indemnity to move away from the parties involved to the insurance provider. It can facilitate greater deal protection for the buyer and help to achieve a seller's desire for a clean exit post deal by avoiding any overhanging liabilities.
Some of the primary reasons for employing a W&I insurance policy, depending on the nature or terms of the transaction, include (i) allowing a seller to obtain a clean exit from the target business or to immediately unlock a greater proportion of its sale proceeds; (ii) reducing or removing the need to place any funds in escrow; (iii) enabling a buyer to avoid bringing warranty claims against a seller who remains with the management team of the target business; and (iv) providing a buyer with a strategic advantage in the context of an auction process, by reducing the seller's exposure and thus enhancing the value of the buyer's bid.
What is W&I Insurance?
W&I insurance is a bespoke insurance mechanism which is triggered by a breach of warranty or indemnity (and, in certain cases, other equivalent provisions) in M&A transaction documents, and which responds by providing cover for any financial losses incurred. A W&I insurance policy can be structured to indemnify either the warrantor/seller (under a seller insurance policy) or the buyer (under a buyer insurance policy). At the moment, we find the most common type of policy is the buyer-side policy.
Key Features of W&I Insurance Policies
A W&I insurance policy is structured as a claims-made policy whereby the insurance provider effectively 'steps into the shoes' of the seller or warrantor. Each policy is bespoke and tailored...