All mergers & acquisitions involve a risk in respect of representations and warranties and a lack of flexibility regarding disposition of (part of) the purchase price following the transaction. Warranty and indemnity insurance provides you with greater flexibility and protect your company's values during a transaction. As the insurance premiums for such insurance have recently fallen significantly, warranty and indemnity insurance is worth keeping an eye on.
W&I insurance covers the financial loss which a company suffers in case of a breach of the representations and warranties given in connection with a sale or purchase of a company. Both the purchaser and the seller can take out W&I insurance policies. The price of W&I insurance has fallen significantly over recent years and insurance companies have to a higher extent adjusted their processes to adapt to M&A processes to avoid delaying the transaction which was previously a challenge, thus making W&I insurance relevant only for specific deal-breakers. Because of the recent developments, we have seen more W&I insurance policies within the last couple of years and generally increased focus on this alternative.
W&I insurance provides a number of benefits in various situations, such as:
- Faster transfer of the purchase price and a full right of disposal over the purchase price immediately after closing: This is the case as a W&I insurance may reduce or eliminate the need to place part of the purchase price in an escrow account.
- Continued cooperation between the purchaser and seller: W&I insurance is of particular relevance in cases where the seller remains part of the company following closing. Usually, the new majority shareholder is reluctant to raise any warranty claims out of fear of damaging the relationship. W&I insurance can eliminate such conflict of interest.
Kromann Reumert recommends
Kromann Reumert recommends that you consider thoroughly whether W&I insurance is relevant for you, including by asking the following questions:
- Are you facing an M&A process of a certain scale where you are looking to secure your values in the best possible way?
- Do you have to distribute the full purchase price to your investors as fast as possible?
- How important is it for you to eliminate warranty liabilities following a sale?
- Could a full right of disposal over the purchase price potentially finance the insurance premium?
- Will the purchaser and the seller continue to cooperate following the transaction?
- Could the use of W&I insurance potentially increase you competitive advantage as a bidder?
The above is only a brief summary of the more detailed Danish article on W&I Insurances which you can access here.
Kromann Reumert's advice
Kromann Reumert has extensive experience in W&I insurance issues and can assist you in deciding whether W&I insurance is relevant in your situation and, if so, how to structure the process to obtain the best possible coverage at the lowest possible price.