Ensuring a smooth and secure transaction is of utmost importance for all parties involved in mergers and acquisitions. But as deals become more complex, so do the risks associated with them. Therefore, one significant concern in this area is the exposure to potential breaches that could result in financial losses. And in order to mitigate these risks, savvy dealmakers have turned to Warranty and Indemnity insurance in M&A deals.
In order to solve all your doubts during the process, we have written this complete article, in which we will delve into the concept of W&I insurance, its benefits, and how it safeguards M&A deals.
What is W&I insurance insurance in M&A?
Warranty and Indemnity Insurance, commonly known as W&I insurance or W&I policy, is a specialized type of shelter that provides protection to both buyers and sellers in M&A transactions. Its main objective is to cover losses arising from infringements of warranties and indemnities made by the seller in the sale and purchase agreement (SPA).
Warranties are statements of fact made by the seller about the target company’s condition, performance and legal standing. Indemnities, on the other hand, are agreements by the seller to compensate the buyer for specific liabilities or losses that may arise after the deal’s completion.
Thus, W&I insurance acts as a financial safety net, offering coverage for unknown or undisclosed issues that might surface post-acquisition. This includes fundamental and fiscal warranties, which can be extended up to 7 years, as well as commercial warranties, in which case it may last up to 3 years.
Why should you use W&I insurance?
Warranty and Indemnity insurance in M&A offers a number of key benefits to parties involved in commercial transactions. As noted above, they are essential to mitigate risks, facilitate the efficient resolution of potential claims and provide additional protection in complex situations.
Enhanced Deal Certainty
In an M&A deal, both the buyer and the seller seek certainty and closure, and by incorporating W&I insurance into the transaction, the buyer gains confidence that potential risks are mitigated. Likewise, the seller can achieve a cleaner exit, as the policy reduces the buyer’s need to hold back a portion of the purchase price in escrow as protection against potential breaches.
Facilitating Cross-Border Transactions
W&I policy also plays a vital role in facilitating cross-border transactions, as it helps bridge the gap between the different legal and regulatory environments of the buyer and the seller, providing a unified and standardized layer of protection.
It’s absolutely remarkable to say that this insurance is customizable to the specific needs of each deal. Coverage can be tailored to address particular risks and concerns identified during due diligence and this flexibility allows parties to safeguard against the most significant potential exposures effectively.
Who usually pays for W&I insurance?
It is common for the buyer to pay for Warranty and Indemnity Insurance in M&A deals, as this figure typically takes the initiative to secure the policy to protect themselves against potential losses in the SPA.
The cost of the W&I policy must be negotiated as part of the overall deal terms, and it may vary based on factors such as deal size, industry risk, coverage limits and other specific considerations. Usually, its cost oscillates between 0.9% and 1.7% of the policy limits.
By paying for W&I insurance, the buyer gains added confidence in the transaction, and the seller can proceed with the deal, knowing that their liability exposure is reduced.
Considerations and recommendations for the use of W&I policy
On one hand, it is essential to understand the policy exclusions of Warranty and Indemnity insurance before applying it in M&A transactions, which may include claims related to ongoing litigation, intentional defaults, fraud or environmental issues.
On the other hand, expert advice on M&A deals is essential when using W&I policy. For instance, in ArsCorporate we can provide guidance on selecting the right insurer, negotiating coverage terms and reviewing relevant documentation right after identifying potential risks and making recommendations to minimize them.
Process for obtaining Warranty and Indemnity insurance
The first step is to request a term sheet that must include the initial details of the transaction. This will serve as the basis for the underwriter’s assessment. And once received, an initial review of the documentation is conducted to determine the feasibility of obtaining insurance.
When the term sheets have been evaluated, the insurer best suited to the needs of the transaction is selected. This is followed by a more detailed review of the documentation, in which the risks covered, exclusions and insurance premium are negotiated. It is important to note that there are time limits, minimum thresholds, deductibles and maximum limits that may apply to the W&I insurance coverage.
Are you buying or selling a company? Do it with us
Whether you are considering buying or selling a company, embracing the benefits of Warranty and Indemnity insurance in M&A can significantly impact the success and security of your deal.
At ArsCorporate, we understand the complexities and risks involved in such transactions, which is why we strive to provide comprehensive solutions that inspire confidence and certainty for both buyers and sellers. Our team of experienced professionals stands ready to guide you through the intricacies of W&I insurance, tailoring coverage to suit your unique needs and fostering a seamless journey to a successful deal closure.
Embrace the power of W&I policy and embark on your M&A journey with ArsCorporate, where safeguarding your interests is our utmost priority. Contact us and let’s make your next M&A deal a resounding success.