Warranty and indemnity insurance - Liberty GTS Homepage · This note explains the key features of warranty and indemnity (W&I) insurance in the context of unlisted company and business

Warranty and indemnity insurance, Practical Law UK Practice Note 0-382-6263

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Warranty and indemnity insuranceby Nicholas Lunn, Head of Southern Europe, Liberty Global Transaction Solutions (GTS),and Vanessa Young, Executive Director in the M&A Transactional Risks Team, WillisTowers Watson

Practice notes | Maintained | United Kingdom

This note examines the key features of warranty and indemnity (W&I) insurance for buyers and sellers in the contextof unlisted company and business acquisitions.

Scope of this noteWhat is W&I insurance?Two types of policy

Buy-side policies

Sell-side policies

When to use W&I insuranceWhy buyers take out W&I insurance

Why sellers take out W&I insurance

Examples of recent deals

What does a buy-side policy commonly cover?Which warranties and tax indemnities are covered?

Enhancements

Amount insured

Policy period

What does a buy-side policy commonly exclude?Known issues

Policy retention

Policy de minimis

Other exclusions

Premium and other costsPremium

Other costs

Overview of the underwriting and placement processBrokers, insurers and underwriters

Process to obtaining non-binding indication of interest



Process from receipt of NBI to underwriting call

Process to inception

Post-inception

Notifications and claimsNotifying a possible claim

W&I insurer response

Defence costs

Disputes

Claims experience

Complementary insurance productsExamples of recent W&I insurance-backed dealsPrincipal documents to be produced on underwriter reviewHard staples: process variations

Scope of this note

This note explains the key features of warranty and indemnity (W&I) insurance in the context of unlisted companyand business acquisitions. It identifies a range of scenarios in which W&I insurance can make a positive contributionto deals, with real-world examples derived from What's Market. It explains the key characteristics of buy-side W&Iinsurance policies in particular, which are by far the most common sort of W&I insurance policy, and the typicalprocess for arranging such a policy. It details typical current levels of premium, brokers' commission and other costs,and typical current levels of policy limit (amount insured), retention and de minimis. The note also addresses recentexperience on the claims side, highlighting among other things the most common causes of breach of warranty inprivate M&A.

For information about share and asset acquisitions generally, see Practice notes:

• Share purchases: overview.

• Asset purchases: overview.

For detailed information about warranties and indemnities, see Practice note, Warranties and indemnities:acquisitions.

What is W&I insurance?

When negotiating warranties and indemnities on the sale and purchase of shares in unlisted companies or on thesale and purchase of a business as a going concern (private M&A), the parties' interests are often far from aligned.The buyer of a target company or business (target) will typically want the warranties in the sale and purchaseagreement (SPA) and, on a share purchase, the tax covenant (or tax deed; references in this note to a tax covenantinclude references to a tax deed) to be as extensive and unqualified as possible, giving it the best chance of making aclaim should the need arise. The seller(s) of the target (seller) will typically want to limit the warranties and, whereapplicable, the tax covenant as much as possible, giving it the cleanest possible exit. The seller may also not wantany sale proceeds deferred, retained or held in escrow.

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These differences between the parties' expectations could easily result in a deal not proceeding. W&I insurance isa specialist insurance product increasingly being used in private M&A to bridge that gap. Most frequently used onprivate equity (PE) exit deals, W&I insurance has now become more prevalent in other types of transactions. Itis commonplace on corporate real estate deals and has expanded into the energy and infrastructure space, withrenewable energy, solar and wind farm portfolio deals also regularly insured.

W&I insurance is designed to cover against financial loss that may arise from a breach of warranty in an SPA or othertransaction document such as a management warranty deed or, on a share sale, from a claim under a tax covenant.It is far more commonly encountered on share deals than asset deals though this is largely accounted for by the factthat most private M&A in the UK is structured as a sale of shares.

In the US, and on some cross-border deals, W&I insurance is known as Reps and Warranties (R&W) insurance.

Two types of policy

There are essentially two types of W&I insurance policy, depending on whether the policy is taken out by the buyeror the seller.

W&I insurance was originally conceived of as a sell-side product, providing sellers of owner-managed businesses"sleep-easy" cover in respect of the recourse buyers had against them under the warranties and tax indemnities inthe SPA. However, the vast majority of W&I insurance policies today are taken out by buyers, often in the contextof deals where recourse against the seller under the sale agreement is nil. This does not necessarily mean that thepremium is paid by the buyer, which is a matter for commercial negotiation (see Who pays the premium?).

Buy-side policies

The need for buy-side W&I insurance typically arises where there is a disconnect between the level and quality ofcontractual protection that is required by the buyer in connection with the warranties and indemnities and thatwhich the seller is able or willing to provide.

In the case of a policy taken out by the buyer (a buy-side policy), W&I insurers or underwriters (such terms beingused interchangeably in this note) effectively step into the shoes of the seller with the intention of providing, as far aspossible, back-to-back cover with the position agreed in the SPA and other transaction documents. With the insurerproviding recourse for the buyer, the seller may be able to cap its liability at a nominal or at least lower amount thanwould otherwise have been possible, enabling it to achieve a cleaner exit.

Among the attractions to the buyer of a buy-side policy are that:

• The buyer can claim directly against the insurer without having to pursue the seller.

• A buy-side policy will provide cover in respect of the seller's fraud.

A buyer may also be able to use a buy-side policy to effectively increase or extend the breadth, scope and durationof the warranties and indemnities that it has been able to negotiate in its favour in the transaction documents (seeEnhancements to level of protection in transaction documents).



Each buy-side policy is individually negotiated from a W&I insurer's template position, with its provisions tailoredto the liability regime negotiated and agreed between the seller and the buyer. The process runs in parallel with thenegotiation of the SPA and other transaction documents.

Ideally the policy incepts at exchange. It covers:

• The warranties given on signing.

• If applicable, the warranties repeated at, and the tax covenant given with effect from, completion, in eachcase subject to a supplemental disclosure letter (or suitable "bring-down" disclosure mechanism).

A buy-side policy can also be put in place retrospectively, either post-exchange or post-completion, with retroactivecover effective from exchange or completion (as applicable) subject to a no claims declaration given on the policyinception date. Any known breaches at the inception date must be disclosed to the W&I insurer and will be excludedfrom cover. For this reason, it is advisable wherever practicable to incept cover on the date the warranties are firstgiven or as soon as possible thereafter.

A buy-side policy is non-renewable. The cost is a one-off premium (see Premium and other costs).

A buy-side policy is a "claims made" policy: it provides coverage if a claim is made against the insured duringthe policy period (see Policy period). For further information, see Practice note, Insurance contract law: generalprinciples: Occurrence and claims made insurance contracts.

"Stapling" W&I insuranceA variation on the above is a buy-side policy instigated by the seller. This is increasingly common, particularly onPE auction sales, where the seller proposes, or insists, that the buyer enters into a buy-side policy to underpin theseller warranties and indemnities. Hence it is often referred to as "stapling" W&I insurance to the transaction.

If the seller only engages an M&A insurance broker to obtain quotations from W&I insurers to expedite the processbut leaves the buyer to freely choose which W&I insurer to instruct (if any), this is referred to as a "soft staple".

Where legal, tax, financial and technical vendor due diligence (VDD) is available, the seller has an opportunity to goa step further by driving the W&I insurance process: selecting the W&I insurer and making it a precondition of anysuccessful bid that the buyer takes out a pre-packaged (and potentially, but not always, reflecting a well-advancedcoverage position) W&I insurance policy. This is referred to as a "hard staple". Among the benefits of a hard stapleare:

• Enabling the seller to achieve a cleaner exit.

• Giving the seller increased control over the W&I insurance process, including coverage and cost. The sellerchooses the insurer and offers a warranty and, where applicable, tax indemnity package that is insurable andstructured in its interests, potentially including:

• limiting its financial liability under the SPA and other transaction documents to a nominal amount (seeInteraction with SPA);

• limiting the time period any warranties and indemnities are given for, with enhanced or extendedcoverage provided by insurers only;

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• qualifying all warranties to the seller's knowledge, with the general knowledge qualificationsynthetically removed for the purposes of the policy (a so-called "knowledge scrape"); and

• (where applicable) using a standalone management warranty deed in conjunction with the SPA to limita corporate seller's liability. (For background to the use of these deeds, see Practice note, Private equitybuyouts: overview and Article, Secondary buyouts: advising the management team.)

• Sell-side pre-underwriting can advance the auction process using VDD. An advanced tailored draft buy-sidepolicy reflecting the findings of the VDD can be made available to all bidders with the auction draft SPA andother transaction documents.

• Identifying any gaps or issues early on, potentially mitigating the risk of price-chipping.

• Creating a level playing field for bidders.

• Obtaining the best insurance solution available. Some insurers can only work with one potential bidder,which could result in an uncompetitive bidder preventing a leading insurer from offering its terms to otherpotential bidders. This scenario could be avoided with the sell-side M&A insurance broker controlling theW&I insurance placement process (see Overview of the underwriting and placement process).

• A controlled W&I insurance process can also avoid negatively impacting the chosen insurer's coverageposition due to any issues of which the insurer might become aware from its review of due diligenceconducted by unsuccessful bidders.

Sell-side policies

A sell-side policy is a W&I insurance policy taken out by the seller. In contrast to a buy-side policy, a sell-side policy:

• Will only respond if the buyer makes a valid claim against the seller under the SPA or other transactiondocuments, and this claim is covered by the policy. The interests of the insurer and the seller, as the insuredunder the policy, in defending any claims made under the SPA by the buyer are therefore closely aligned. Ifthere is a buyer claim, the seller cannot walk away and leave the claim to insurers; it will be required to co-operate with the insurer to benefit from the protection provided by the policy.

• Does not cover fraud on the seller's part.

• Is inherently less flexible, as it can only reflect the underlying contractual liability agreed by the seller in theSPA – larger policy limits and policy enhancements, for example, are not available.

For these reasons, sell-side policies (as opposed to seller-initiated buy-side policies) are far less common than buy-side policies. Also, some W&I insurers can only underwrite sell-side deals if there is VDD, which is often not the case.

When to use W&I insurance

Why buyers take out W&I insurance

Buyers typically choose to take out buy-side W&I insurance for the following reasons:



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• W&I insurance alleviates concerns that inadequate protection is available from the seller or that theprospects of recourse against the seller are too uncertain. It offers the prospect of significantly greatercontractual protection and an A-rated counterparty to recover from.

• It provides additional reassurance when investing in unfamiliar jurisdictions or territories and serves tomitigate enforcement difficulties where the seller and buyer are in different or multiple jurisdictions.

• It helps preserve commercial relationships, offering an alternative to suing either the seller or, on asecondary buyout, a management team that has remained in the business.

• It further reassures investors, shareholders and other key stakeholders as well as giving extra comfort forlenders (who may be assigned the benefit of the policy proceeds or, less commonly, be included as a losspayee).

• It can be used by buyers as a component of their bids in an auction process to enhance their prospects ofsuccess. As W&I insurance has become more widespread however this has become less of a differentiatingfeature.

• The seller has made it a condition of the deal that the buyer take out a buy-side policy (see "Stapling" W&Iinsurance). For the seller it helps facilitate a cleaner exit, by:

• enabling the seller to significantly limit possible recourse against it, commonly avoiding the need forescrow arrangements; and

• permitting a faster distribution of the sale proceeds.

This is especially attractive to PE sellers, for whom a clean exit and improved internal rate of return (IRR)are key.

Why sellers take out W&I insurance

Sellers may still choose to take out sell-side W&I insurance in more limited circumstances for the following reasons:

• It may be attractive to fund managers contemplating a voluntary liquidation in an "end of fund life” scenario.W&I insurance helps avoid or reduce ongoing administration costs and facilitates maximum and fasterdistribution of investment returns to investors, improving IRR.

• It may provide peace of mind to individual sellers, for example in a family concern. If there is a claimhowever, the family members cannot simply leave the claim to insurers; they will be required to co-operatewith the insurers to benefit from the protection provided by the policy.

• Disposals have already occurred and the seller is to be wound up.

• The buyer has rejected using W&I insurance outright.

Examples of recent deals

For some recent examples of W&I insurance-backed private M&A deals, see Examples of recent W&I insurance-backed deals. All were announced in the second half of 2019.



As this information has been extracted from Practical Law's What's Market (UK) deals database, the deals are notrepresentative of all private M&A (they are either reverse takeovers or Class 1 acquisitions or disposals). Someagreements (and policies) may be governed by US or other laws. Nevertheless, they give a flavour of the differentsizes and types of deal in which W&I insurance can play a role.

Fuller details of the coverage obtained may be accessed by clicking on the link in the first column. For example:

• Seller recourse. In Bovis Homes Group PLC's acquisition of Galliford Try plc's Linden Homes andPartnerships & Regeneration businesses, liability for claims under the warranties and the tax covenant waslimited to £1. In Studio Retail Group plc's disposal of Findel Education Limited, the seller's liability underthe general warranties and the tax indemnity was limited to £250,000, a sum equal to the W&I insurancepolicy retention.

• Amount insured. In WH Smith PLC's US$400 million (£312 million) acquisition of Marshall Retail GroupHolding Company, Inc, the buyer obtained coverage of US$40 million (10%). In London Stock ExchangeGroup plc's US$27 billion (£22.3 billion) reverse takeover of Refinitiv, the buyer obtained coverage of US$1.157 billion (4.3%).

For more, and more up-to-date, examples, see What’s Market, Listing Rules transactions: deals using W&Iinsurance.

What does a buy-side policy commonly cover?

The terms of the specific policy will always prevail but the starting point is that a buy-side policy aims to provide, sofar as possible, back-to-back cover for the warranties and, where applicable, tax indemnities in the SPA and othertransaction documents.

This is on the assumption that the transaction documents, both as regards warranties and indemnities:

• Provide for a disclosure process that is consistent with those customarily found in other transactions of thesame size and scope, involving parties engaged in similar operations.

• Reflect arm's length and balanced negotiations between the parties.

However, the policy will typically only cover unknown issues in areas which have been the subject of due diligence(see Known issues). It follows that a key area of interest to underwriters will be the quality and scope of the duediligence exercise (see Due diligence).

On the other hand, a buy-side policy may be crafted in such a way as to extend the protection afforded to thebuyer beyond that available on the face of the SPA and other transaction documents (see Enhancements to level ofprotection in transaction documents).

As to what a buy-side policy typically does not cover, see What does a buy-side policy commonly exclude?.

Which warranties and tax indemnities are covered?

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A European-style buy-side policy typically contains a warranty spreadsheet which confirms which provisions in theSPA and other transaction documents are covered, partially covered or excluded.

Partial cover means that part of the warranty or indemnity is covered. However an element of a warranty could beexcluded, qualified by knowledge or otherwise rewritten for the purposes of the policy as the drafting may be viewedby the underwriter as being too buyer-friendly or deemed to relate to an excluded item (see Other exclusions).

For the purposes of the policy, as distinct from the SPA and other transaction documents, both disclosures (generaland specific) and the policy de minimis apply to the tax covenant. This is a departure from normal practice onuninsured deals (see Practice note, Share sales: tax covenant: Disclosure), meaning that in this respect the policyoffers less protection than an orthodox tax covenant - although this distinction is perhaps academic where onlynominal recourse is offered by the seller. Nor are W&I insurance policies designed to cover secondary tax liabilities,diverted profits tax liability or transfer pricing. Some W&I insurers will remove this exclusion (or not include it inthe first place) if not relevant. Identified issues can potentially be covered for an additional premium if separatelydiligenced.

The availability of tax assets has traditionally been excluded from cover under W&I insurance policies. However,more recently, some W&I insurers will consider covering the availability of tax assets to the extent that:

• The buyer can demonstrate that it has paid for such tax assets.

• Adequate due diligence has been undertaken on such availability (both pre- and post- completion).

Any cover for such tax assets may, however, be subject to a general exclusion relating to any voluntary acts oromissions by the buyer and/or the target group.

A share seller in an auction process may decide not to offer any form of tax covenant. However, since most finallynegotiated deals will include tax cover in some shape or form for the buyer, some W&I insurers can offer (subjectto underwriting and typically for an additional premium) a market standard tax covenant synthetically in theW&I insurance policy itself (with no need for one to be included in the transaction documents). Where this policyenhancement is offered, the underwriting will be particularly focused on the scope of the external tax due diligenceundertaken (including any relevant specific tax disclosures provided by the seller). Enhancements

Enhancements to level of protection in transaction documentsOne attraction of a buy-side policy is the opportunity it gives an insured to increase the level of protection itwill receive beyond that which is available on the face of the transaction documents. This is typically achievedby increasing or extending the breadth, scope and duration of the warranty and, where applicable, tax indemnitypackage. Examples include synthetic tax covenants and extended policy periods (see Which warranties and taxindemnities are covered? and Policy period).

To obtain cover beyond the package initially offered by the seller, the proposed insured and its advisers must beable to demonstrate that:

• Additional warranties have been included and considered in both the general and specific disclosure exerciseundertaken by the seller in the usual way.




• The scope of the additional warranties requested is supported by (ideally) external legal, tax, financial andtechnical buy-side due diligence which is neither significantly limited nor materially restricted in scope (forexample, by availability of information, materiality threshold, review period, jurisdiction or sampling).

Enhancements to level of protection in W&I insurance policiesThere is a large array of potential W&I insurance policy enhancements available which go beyond simply extendingthe breadth, scope or duration of the warranty and, where applicable, tax indemnity package. Although notuniversally offered on every deal by all W&I insurers, examples include:

• Affirmative cover for certain low-risk tax matters identified in the buy-side tax due diligence report.

• Nil retention (see Policy retention) or nil policy de minimis (see Policy de minimis) applicable tofundamental warranties (title, capacity and authority) only.

• US-style coverage items for a significant additional premium, either as a package or as individual bolt-ons,such as:

• all loss to be calculated on an indemnity basis;

• removal of general disclosure of buyer due diligence (although the required no claims declarations willtypically confirm that this has been read and understood by the deal team);

• removal of general disclosure of the data room;

• removal of the warranty spreadsheet (so that all warranties are essentially covered as drafted);

• nil policy de minimis (usually accompanied by a higher corresponding policy retention); and

• a synthetic "scrape", where applicable, of (a) general knowledge qualifiers (subject to certain relativelystandard exceptions) and/or (b) materiality qualifiers (as to assessment of breach and quantum).

Amount insured

Extent of coverWhilst the amount insured (or policy limit of liability) varies from deal to deal, many insureds buy a policy limit ofbetween 10% and 30% of the target's enterprise value (EV), seeking to replicate the position that might be reachedin a negotiated SPA where either the seller is liable for meaningful recourse or there is an escrow arrangement. Ondeals of £500 million or more, a round figure of £50 million or £100 million is also common.

More conservative clients, particularly those with restrictive investment guidelines or prescriptive lenderrequirements, may also buy anti-embarrassment cover to the full EV for fundamental warranties, particularly oncorporate real estate deals or in unfamiliar jurisdictions.

MaximumThe maximum limit available for a single risk is, in theory, currently in excess of £1 billion, as part of a programme(or tower) of W&I insurance. In such a case, the deal would be underwritten by one of a select group of leading W&I



"primary" (or followed) insurers, negotiating a primary policy wording with the proposed insured with a policy limitfor the first defined percentage of loss.

Additional insurance capacity is then sourced and structured by the M&A insurance broker in the most efficient waypossible up to the desired policy limit of liability from additional "excess" insurers.

A typical primary layer is £30 million to £50 million, with additional excess layers (of potentially hundreds ofmillions) up to the desired policy limit.

MinimumThe minimum limit of insurance available is generally dictated by the minimum levels of premium offered by W&Iinsurers. An insurance limit of liability of £5 million or below will typically attract minimum premiums from W&Iinsurers ranging from £40,000 to £60,000.

Thanks in large part to new entrants focusing on the SME market, even more competitive pricing may be availablefor smaller deals.

Factors affecting selection of policy limitThe policy limit will be dictated to some extent by the negotiations between the seller and the buyer, which party ispaying (or contributing to) the premium and their respective appetites for retaining or transferring risk.

When choosing an overall policy limit, the buyer should also consider whether the limit will be sufficient to coverthe defence costs associated with potential third party claims. Whilst these costs are typically covered by a W&Iinsurance policy, they may erode the policy limit (subject to the policy retention).

Tax is another factor to consider. It is not always clear whether insurance policy proceeds paid as the result of acovered loss under a W&I insurance policy constitute taxable income (see Article, Common issues in structuringinsurance solutions for M&A transactions: Tax of insurance proceeds). W&I insurance policies have thus evolvedto include relatively standard gross-up language stating that loss will be grossed up under a policy were this to bethe case, subject to the overall policy limit. Insurers will also offer a policy limit to include such grossed-up amountif deemed necessary.

Particular care should be taken if a novation or assignment of policy proceeds is envisaged as W&I insurers will likelynot agree to be placed in a worse position (in other words, if the rate of corporate income tax in the new jurisdictionis higher, the W&I insurer will likely not agree to gross up the difference). Policy period

The policy period will either reflect the corresponding provisions in the SPA and other transaction documents or,more commonly, be extended synthetically for the purposes of the policy, typically up to a maximum of:

• Three years for general warranties.

• Five years for employment and environmental warranties (in certain jurisdictions).

• Seven years for fundamental warranties, the tax warranties and tax covenant.

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Maximum policy periods are typically between 87 and 90 months, allowing time for any gap between exchange andcompletion. However, they vary from insurer to insurer.

Exceptional sign-off is also potentially available from certain insurers, for an additional premium, for liabilities injurisdictions where the statutory limitation for liability or challenge is longer (say, ten years).

What does a buy-side policy commonly exclude?

Known issues

A common misconception is that W&I insurance policies cover known issues, for example which a seller disclosesor which a buyer has identified in its due diligence or in respect of which a seller agrees to provide an indemnity.This is not the case. Whilst the terms of the specific policy will always prevail, a standard buy-side policy is designedto cover only unknown issues in areas which have been the subject of due diligence (see Due diligence). This appliesboth to the warranties and tax indemnities.

Coverage of known issues may sometimes be obtainable either as a specific sub-limit within the W&I insurancepolicy itself or in a standalone policy (see Complementary insurance products). Policy retention

W&I insurers typically require that the parties involved accept a certain portion of the risk, and this is reflected inthe policy retention (also known as the excess, attachment point, franchise or co-insurance). However expressedthis is the financial threshold at which the insurer will become liable under the policy and below which it is generallynot liable. It effectively performs the same function as a basket in a SPA (which itself should be disregarded in thepolicy to ensure there is no double trigger for making a claim).

In the arena of private M&A, W&I insurers will usually seek a policy retention of at least 0.5% EV before the insurancepolicy attaches (with a fixed 1% EV now reserved for higher-risk deals only). On certain deals W&I insurers mayprovide alternative options (for an additional premium):

• Tipping retentions: once aggregated losses exceed the policy retention, the claim paid by the insurer will tipto an agreed lower amount (for example, 0.5% EV tipping to 0.25% EV) or even nil, rather than only payingout for the element above the policy retention.

• Dropping retentions: a reduced policy retention, usually after a set period of time when the liability periodfor the general warranties has expired and only liability for fundamental and tax warranties remains.

• Nil retentions: offered as standard by most W&I insurers on corporate real estate and many renewablesdeals.

Different retentions may apply within the same policy, for example by applying a higher retention to specific issuessuch as tax, or where a higher materiality or disclosure threshold may have been applied to certain warranties, orwhere multiple SPAs are covered by the same policy.

Interaction with SPA



Typically, the policy retention mirrors the overall seller liability cap negotiated in the SPA in order to avoid thebuyer/insured having "double cover". However, an established trend over recent years has been for recourse againstthe seller to be limited to a nominal amount (as low as £1). Whereas W&I insurers previously insisted on some "skinin the game" to focus the minds of those preparing the seller's specific disclosures, nil seller recourse structures havebecome accepted market practice.

The existence of the nominal £1 seller liability remains important:

• From a theoretical insurable interest perspective: there must be an underlying liability amount to disapplyand therefore insure in the usual construct of a W&I buy-side insurance policy (see Practice note, Insurancecontract law: general principles: Insurable interest).

• Since the £1 limit could be disapplied in the event of seller fraud: a W&I insurer will always reserve the rightin the policy to subrogate against the seller in the event of fraud (for a statement of the basic principles,see Practice note, Insurance contract law: general principles: Subrogation), and this provides a directcontractual nexus where it has already paid out to the buyer under the policy.

On nil recourse deals, where, for example, only a 0.5% EV retention W&I insurance policy can be obtained, anuninsured gap arises in respect of the first part of loss. Whether the seller is liable for this part is a matter forcommercial negotiation.

Another possible commercial solution could be for the seller to remain liable for matters which are excluded underthe policy, including as a result of the policy retention. (This can make negotiating the coverage position under thepolicy much easier.) A more advanced structure for a buy-side policy (with a meaningful retention) is for the seller'sliability to (re-)attach above a certain percentage of EV up to a cap, enabling the buyer to reach a higher overallpercentage of EV using a more palatable blend of seller recourse and W&I insurance.

Often on larger deals the seller remains liable up to the full EV for breach of the fundamental warranties. A smallpremium discount can sometimes be negotiated to remove these from the scope of the W&I insurance policy. Policy de minimis

The policy will include a de minimis provision which is designed to replicate the small claims threshold in the SPA.This is usually 0.05% EV to 0.1% EV (other than on very large deals where this remains a very high figure) or, onsimpler corporate real estate deals, a fixed figure such as £10,000. This needs to match:

• The disclosure materiality thresholds used by the seller in compiling the data room and the general andspecific disclosures.

• The materiality thresholds used in the (ideally) external buy-side legal, tax, financial and technical duediligence reports.

The policy de minimis will usually follow the formulation in the SPA which is typically a "series of claims"formulation. As with policy retentions, different de minimis thresholds may apply within the same policy, forexample by applying a higher de minimis to specific issues such as tax, or where a higher materiality or disclosurethreshold may have been applied to certain warranties, or where multiple SPAs are covered by the same policy. Other exclusions






Mandatory exclusionsBuy-side policies will typically exclude:

• Matters within the actual knowledge of the deal team on inception of the policy (see Known issues).

• Buyer (as opposed to seller) fraud.

• Purchase price adjustments. On a completion accounts deal, these would normally be dealt with by meansof completion accounts adjustments, not warranty claims. On a locked box accounts deal, leakage andpermitted leakage will be excluded, as being within the control of the parties.

• Fines which are uninsurable by law or which might constitute a breach of any sanctions.

• Pension underfunding.

• Secondary tax liabilities, diverted profits tax liability and transfer pricing.

Deal-specific exclusionsEach W&I insurance policy is tailored to the transaction at hand. The following is a non-exhaustive list of possibledeal-specific exclusions:

• Specific indemnities. A TUPE indemnity or indemnity for example in respect of some ongoing litigationwould be regarded as a known issue.

• Covenants or undertakings relating to the period between exchange and completion, where notsimultaneous. These relate to the future conduct of the parties, which is within their control.

• Historic reorganisations or restructurings (particularly any tax consequences, unless specifically diligenced).

• Forward-looking warranties, including projections or estimates. Cover is provided for historic liabilities only.

• Warranties relating to adequacy or sufficiency. Insurers typically consider these to be overly subjective.

• Lack of due diligence or limited scope. The starting position is that cover is only available in diligenced areas.

• Areas that should more properly be covered by existing insurances (although, subject to underwriting, incertain circumstances W&I insurers will restrict exclusions to sit in excess of existing insurances on a no"difference in cover" basis), including:

• product and product recall liability;

• professional liability;

• recoverability of debts. This is not excluded by all W&I insurers as standard, but the rationale is thatthis should more properly be the subject of a credit risk insurance policy;

• cyber risks (including data breach or malware hack). Standalone cyber risk policies are moreappropriate (see Complementary insurance products); and

• data protection and privacy compliance.



• Condition of real estate, assets or stock. Insurers expect these to be surveyed or inspected by independentprofessionals rather than warranted, and potentially covered by existing insurances such as latent defectsinsurance.

• Construction, regeneration or development risk. Construction risks should sit within a constructioninsurance policy (for further information, see Practice note, Construction all risks (CAR) insurance). Someinsurers may also seek to exclude compliance with planning matters which cannot be verified as part of astandard underwriting process.

• Consequential loss (including loss of profits, save where these are reasonably foreseeable direct losses).

• Environmental and pollution (including asbestos). This depends on the target and its real estate assets. SomeW&I insurers can relax this exclusion where specified criteria are fulfilled.

• Jurisdiction-specific issues such as:

• anti-bribery and corruption. W&I insurers will typically not cover this in certain jurisdictions,outside the top 25 low-risk jurisdictions (identified as such in the Corruption Perceptions Index 2018maintained by Transparency International); and

• government expropriation and interference, including the availability (or not) of subsidies and reliefs.These are regarded as essentially political risks.

In higher-risk jurisdictions, operations may be excluded in their entirety.

• Industry-specific exclusions, for example:

• medical malpractice, including Medicare and Medicaid in the US;

• healthcare sector: bodily injury or harm (including physical, mental or sexual abuse);

• energy deals: the quantity, quality or recoverability of hydrocarbons or reserves along with anydecommissioning liability (for more information, see Practice note, Energy insurance: overview); and

• financial institutions: compliance with capital adequacy rules, financial mis-selling (or certain othertypes of consumer protection) legislation or handling client money regulations.

In response to the COVID-19 outbreak in Q1 2020, certain insurers sought to include general or targeted exclusionsin W&I insurance policies, and the impact of COVID-19 became an area of increased underwriting focus. Theapproach taken varies between insurers and depends on the sector.

Premium and other costs

Premium

CostThe premium for a W&I insurance policy is calculated by reference to the target's EV and expressed as a percentageof the policy limit purchased (the rate on line). For example, a policy limit of £10 million on a £100 million EV deal


https://www.transparency.org/cpi2018




with the premium charged at £100,000 (exclusive of taxes) would be a rate on line of 1%. This is gross of broker'scommission (typically between 17.5% and 20% of the premium).

Though many factors influence the cost of W&I insurance, for operational businesses in the UK the rate on lineis currently typically somewhere between 0.9% and 1.3%. More complex cross-border businesses may be moreexpensive. Highly sought-after deals may be cheaper. For corporate real estate deals, where pricing is at its mostcompetitive due to the perceived (and historic) lower rate of claims, pricing can be lower, with rates on line between0.5% and 0.8%.

Factors which affect the level of premium for a buy-side policy include:

• The level of the policy retention.

• The extent of the liability of the seller in the SPA and other transaction documents.

• "First loss" scenario (which refers to the percentage of the policy limit of liability at risk compared to theoverall consideration).

• How seller-friendly the transaction documents are, for example, if the warranties are limited by awarenessor subject to customary materiality qualifications. For a note on the range of possibilities, see Checklists,Seller warranties and limitations on liability: commonly negotiated issues: share purchases and Sellerwarranties and limitations on liability: commonly negotiated issues: business purchases.

• The governing law and jurisdiction of the SPA and other transaction documents (and of the W&I insurancepolicy, which typically matches to avoid potential conflict of law issues, although W&I insurers increasinglyprefer arbitration).

• The industry sector of the target.

• The geographical location of the risk and footprint of the target.

• The parties to the deal, their financial stability, and quality of advisers.

• Other factors, such as whether it is a "hard" or "soft" W&I insurance market (for example, the run-up toChristmas is typically W&I insurers' busiest time of year, with underwriting capacity constraints which candrive up pricing).

• Historic and current W&I insurance claims trends in the relevant industry and sector (which varies by W&Iinsurer and its (re)insurers).

US R&W pricing is significantly higher due to the differences in both the coverage position and underlying legalconcepts and approaches. For further information, see Practice note, US and UK share purchase agreements:comparing approaches and Article, Warranty and indemnity insurance: a global reach.

Who pays the premium?If W&I insurance has been proposed by the seller, the seller may offer to contribute to the premium, either up toa set maximum amount, percentage of cost or what the seller feels is a reasonable policy limit, with any additionalrequirements, enhanced or higher policy limits options being for the account of the buyer.

In other cases, it is an identified deal cost which is factored into pricing by the buyer when making its bid. It variesfrom deal to deal.










When is the premium payable?Typically, the premium must be settled no later than 20 business days after completion assuming simultaneousexchange and completion.

Where there is a significant gap between exchange and completion, it becomes a matter for negotiation whether theinsurer will require a deposit on inception and if so, how much and how much would be refundable if the deal doesnot proceed to completion. Sometimes, where the period between exchange and completion is likely to be more thanthree months, W&I insurers will insist on a non-refundable 10% deposit at signing. Other costs

The following costs are also incurred in the placing of a W&I insurance policy:

• Insurance Premium Tax (IPT). The applicable IPT varies from jurisdiction to jurisdiction, andtechnically applies with reference to where the risk is located. For the majority of deals, this will be thejurisdiction of incorporation of the proposed insured. For a UK-incorporated entity, the rate of IPT iscurrently 12%. For more information, see Practice note, Insurance premium tax: Warranty and indemnityinsurance and Article, Common issues in structuring insurance solutions for M&A transactions: Insurancepremium tax.

• Underwriting fee. Insurers will likely charge an underwriting fee which ranges from £10,000 (plusirrecoverable VAT) for simple deals to £50,000 or more (plus irrecoverable VAT) for complex, time-pressured or cross-border deals. The underwriting fee usually covers the insurer's external legal costs. Onlarger policy limits, this cost may be waived (or deducted from the premium) if the policy incepts, but it ismore common for it to be charged in addition to the premium. To commence underwriting, the proposedinsured may be required to enter into an expense agreement in respect of the underwriting fee. The fee couldbe payable whether or not the proposed insured decides to purchase a policy, typically on a time-spent basis.

• Break fee (or loss of opportunity fee). If required to enter into underwriting pre-exclusivity for abidder, or with "clean teams" for multiple bidders on the same deal, or in an expedited timeframe, insurersmay charge an additional fixed or staged break fee representing the time and other resources allocated.M&A insurance brokers may have an analogous fee structure, particularly where the W&I insurance is beingstapled (see "Stapling" W&I insurance).

• Increased external advisers' fees. Negotiating the W&I insurance policy, including the coverageposition and assisting with providing written responses to underwriting questions, may require an additionalscope of work to be factored into the proposed insured's terms of engagement with external advisers.

Overview of the underwriting and placement process

Brokers, insurers and underwriters

Most placements in the W&I insurance market are arranged through the specialist M&A departments of majorinsurance broking houses who have in-depth experience and expertise in this area.

M&A insurance brokers are engaged as advisers to the potential insured and have a duty to act in its best interestsin advising and placing the W&I insurance policy (see Practice note, Insurance brokers: duties to clients). They





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assist in managing the process and documentation requirements and should also be able to advise in relation toinsurance structure, policy enhancements and an insurer's typical position on coverage, premium and terms. Ingeneral, brokers are remunerated through commission from insurers or at a pre-agreed fee rate with the insured.

An M&A insurance broker should ideally be engaged as early as possible in the process. A sophisticated broker actsas a trusted deal adviser, able to help guide the buyer and its advisers from initial feasibility or quotation stage onhow best to structure the W&I insurance for the deal through to claims advocacy during the lifetime of the policy.They should identify any potential issues at an early stage, devising a comprehensive market strategy to maintaincompetitive tension between insurers and advising on insurers' likely risk appetite. They should have a view onthe potential insurability of the warranty and, where applicable, tax indemnity package (including any exceptionsand alternative solutions), likely deal-specific exclusions and areas of heightened underwriting risk based on recentmarket practice for the relevant industry and sector.

Larger broking houses may also have a dedicated claims team, with specialists able to assist with complementaryinsurance solutions where needed (see Notifications and claims and Complementary insurance products).

The term "underwriter" is used interchangeably to describe both those who assess the risk and the company theywork for. Technically there is a difference between:

• An insurer (or company market), with its own insurance capital.

• A managing general agent (MGA) which usually, but not always, underwrites on behalf of its own insurancecapital plus typically a consortium of other insurance syndicates.

• A specialist managing general underwriter (MGU) (also referred to as a coverholder) which has delegatedauthority to underwrite on behalf of a consortium of insurance syndicates. An MGU or coverholder is not aninsurer and does not pay out the loss itself.

This distinction could be relevant in terms of both underlying security rating and claims management. For an MGAor MGU, potential insureds should consider with their broker both the security rating of the underlying insurers andthe track record of the designated claims lead (which will be an underlying insurer, rather than the MGA or MGUthat negotiated and underwrote the policy).

There are now over 25 insurers in the London W&I insurance market with a combined capacity for a single risk inexcess of £1 billion. A select few W&I insurers can offer over £100 million in a single policy. Process to obtaining non-binding indication of interest

Approach by brokerThe first step is to obtain a non-binding indication (NBI), that is to say a formal quotation from a W&I insurerincluding pricing and coverage comments. Confidentiality or non-disclosure agreement (NDAs) are typically put inplace at this stage.

The broker will usually require:

• A brief description of the target: ideally an information memorandum, if one exists, or a recent managementpresentation. Failing that, the most recent accounts, any heads of terms and any target website details.



• Ideally the buy-side mark-up of the SPA and other transaction documents, though quotations are regularlyobtained based on auction drafts.

• Approximate EV of target (or a range if commercially sensitive).

External due diligence reports likely do not need to be provided at this stage.

On receipt of this information, the broker will advise on the structure of cover available, together with potentialpolicy enhancements required, and make a formal submission to potential insurers to obtain an NBI.

At this stage there may be few, if any, documents. However, most M&A insurance brokers can supply detailedconceptual guidance on the structure of policy required and likely pricing if provided with some basic details of thetransaction (including approximate deal size, industry sector and jurisdiction). The broker can produce a feasibilityreport to enable the proposed insured and its other advisers to consider the possible W&I insurance solutions.

Some buyers may, with the intention of maintaining competitive tension or to satisfy public tender requirements,seek to engage more than one M&A insurance broker for the same deal. Whilst there is nothing to stop both the sell-side and buy-side approaching the W&I insurance market via separate brokers, or for one party to engage with morethan one insurance broker, if W&I insurers receive an approach for or on behalf of the same party, they will request a"broker of record letter" before providing terms. This is a short letter from the proposed insured confirming that thebroker in question has been exclusively appointed to act for them. It is submitted that competitive tension is betterachieved by one broker approaching multiple W&I insurers than by approaching multiple brokers (the underlyingW&I insurers they will typically approach are the same).

Response from insurerFollowing a review of the formal submission, a process which typically takes two to three business days (but can beexpedited), the W&I insurers will provide an NBI (subject to underwriting) specifying:

• The cost of premium for various different limit options.

• The level of policy retention and de minimis.

• The anticipated coverage position, including detailed comments on the transaction documents.

• An outline of any policy enhancements offered.

Some W&I insurers will highlight certain warranties, particular concerns with any due diligence scope, or other areasof heightened underwriting risk. The M&A insurance broker should be able to assist in identifying and pre-emptinglikely W&I insurer requirements on these points. Each case will be considered on its own merits and coverage offeredaccordingly. In most cases, the more information W&I insurers can obtain on the various risk areas, the wider thecoverage they can offer. If no further information is provided, or the further analysis or specific disclosures areunfavourable, these areas of heightened underwriting risk typically turn into deal-specific exclusions.

The broker will address any queries or follow-up requests with insurers to ensure a fair and direct comparison. Itsreport to the proposed insured (NBI report) will usually provide commentary or a recommendation on the preferredinsurer, sometimes to be discussed on a call.

The proposed insured should not have incurred any costs at this stage.



Process from receipt of NBI to underwriting call

Although it varies from deal to deal, the quickest timeframe to complete a typical underwriting process is betweenfive and ten business days after signing the expense agreement. This process can be expedited. However, on somedeals the process can take much longer due to information flow or changes in commercial terms and/or dealstructure.

To commence the underwriting process, the selected W&I insurer will require access to all necessary informationabout the deal as and when it becomes available. For a brief outline of the principal documents that will be needed,see Principal documents to be produced on underwriter review. For a description of the insured's duty to make afair presentation of the risk to an insurer, see Practice note, Insurance: the pre-contractual duty of fair presentationunder the Insurance Act 2015. The W&I insurer's underwriting review comprises:

• A review of data room information, transaction documents (including specific disclosures) and all duediligence reports.

• Underwriting questions, potentially split into two or more tranches, typically with:

• tranche 1: some initial general questions about deal, structure, timetable etc; and

• tranche 2: more specific underwriting questions usually arranged by topic (such as legal, tax, financial,technical) following review of the due diligence reports and specific disclosures.

• Negotiation of the front end of the insurer's standard policy wording (with input from the M&A insurancebroker and the proposed insured's legal advisers) with the coverage position typically provided after theunderwriting call.

• An underwriting call (see Underwriting call).

The W&I insurer will then issue a policy wording with its full coverage position, including any deal-specificexclusions, for it to be finalised and agreed ready for inception.

Underwriting callAn underwriting call is an exploratory call, introduced by the M&A insurance broker but led by the lead underwriter.There may be assistance from external legal counsel.

Underwriting calls typically last between one and two hours (an agenda with underwriting questions is usuallycirculated before the call). Insurers often request written answers to the underwriting questions in advance so thatquestions are discussed on an exceptions-only basis. It gives the underwriter(s) the opportunity to speak directlyto the deal team members and diligence advisers who have been involved in and negotiated the deal, enabling theunderwriters to address concerns with a view to providing as fulsome cover as possible.

Ideally a deal team member (and not an adviser) should be the key point person for leading the responses on theunderwriting call, deferring specific questions or relevant sections to specific advisers (for example, legal, tax orfinancial, or by jurisdiction) as required.

"Red flags" for the W&I insurer will be any issues apparent from responses:





• Which do not appear to have been diligenced.

• For which the warranties or indemnities are deemed the sole protection or comfort for the insured.

Key areas of focus on underwriting calls are typically:

• The quality of due diligence (for example, scope, materiality and quality across all operations andjurisdictions), including the interaction between VDD scope and “top-up” due diligence.

• Evidence of arm's-length negotiations.

• The insured's overall understanding of the target.

Insurers may be able to dispense with the need for an underwriting call on simple deals with detailed writtenresponses.

Due diligenceThe buyer will typically have external legal, tax, financial and technical buy-side due diligence reports available toit to help facilitate a smooth underwriting process. External due diligence (as distinct from internal due diligence,even where undertaken by a sophisticated in-house team), particularly for tax, remains the strong preference of W&Iinsurers in the London market. However, exceptions to this rule can be negotiated on a deal-by-deal basis.

VDD reports, where available, although helpful from an underwriter's perspective are often limited in terms of scopeand materiality. VDD also tends to present details of the target by way of a "fact book" only and therefore cansometimes be perceived by underwriters to lack analytical depth and rigour. This can be contentious in a tightlycontrolled phased auction process where bidders looking to purchase a buy-side policy are not given access tocomplete information or the opportunity and time to review documents which would allow them to achieve a cleancoverage position in the buy-side policy. If there is a significant delay between signing and completion, a process toendorse cover post-inception, removing exclusions in specific areas where due diligence review was incomplete atsigning but subsequently undertaken, may sometimes be negotiated with insurers.

An exceptions-only (or "red-flag") report format for buy-side due diligence is acceptable to underwriters either ona standalone basis or where it supplements the scope of any VDD. The guiding principle should always be whetherthe matters reviewed adequately match the scope of the warranty (and, where applicable, tax indemnity) package.Where supplementing VDD, no duplication of work is required. However, underwriters expect the buy-side advisersto cast a critical eye over the VDD scope, supplementing it as they would on an arm's length deal where no W&Iinsurance is contemplated.

For a fuller description of the due diligence process in private M&A, see Practice note, Due diligence and post-completion integration: acquisitions. Process to inception

The M&A insurance broker will lead the W&I insurance policy negotiations with input from the proposed insured'sdeal team members including legal, tax and financial advisers. Most brokers (and certain law firms and repeatpurchasers of the product) will have a pre-agreed front-end W&I insurance policy wording template with each W&Iinsurer.

The W&I insurance policy should be in agreed form ready for inception at the same time as exchange of the SPA.





ExchangeWhen the proposed insured is ready to incept cover, it provides the M&A insurance broker with:

• Written confirmation (typically via email) instructing the broker to "bind cover" on its behalf.

• Confirmation that there have been no changes to the final transaction documents previously provided to theinsurer (ideally with scanned signed and dated copies to follow later the same day).

• A signed and dated electronic copy of the signing no claims declaration, signed by a duly authorisedsignatory of the proposed insured and/or a deal team member(s). This is an agreed form letter, usuallyappended to the execution version of the policy, from the proposed insured to the W&I insurer. It confirmsthat a defined group of identified deal team members at the insured do not have actual knowledge of abreach of the warranties or, where applicable, liability under the tax covenant (or in some policies, a broaderformulation of facts or circumstances which could reasonably be expected to give rise to such breach orliability).

• For certain (but not all) insurers, a copy of the policy signed by a duly authorised signatory of the proposedinsured.

The insurer will then provide signing cover confirmation via the broker of either of the following:

• A signed and dated policy (in the majority of cases).

• Confirmation and final agreed policy wording(s) for insurers where a Lloyd's of London slip is required.

The above process usually suffices. On certain deals, conditionality and/or escrow arrangements for signed policiesto be released can be built into the policy language to provide certainty that a signed policy exists before exchange.

Split exchange and completionTo ensure a smooth process, drafts of any additional disclosures or amendments should be provided in advance ofcompletion to allow insurers the opportunity to review and comment.

Significant new disclosures may result in new exclusions being included in the policy wording with effect fromcompletion by way of an endorsement.

On the completion date, the proposed insured provides the M&A insurance broker with drafts of:

• Confirmation that completion has taken place with no changes to the transaction documents.

• An electronic copy of the executed completion no claims declaration.

The insurer will then provide completion cover confirmation via the broker that the policy remains in full force andeffect, subject to its terms. Post-inception

Following inception, the proposed insured will need, within 20 business days, to:



• Provide signed and dated copies of all transaction documents (if it has not already done so).

• Provide a copy of the virtual data room on a USB, CD-ROM or data stick.

• Provide evidence of satisfaction of any deal-specific conditions.

• Arrange for payment of both the premium (plus IPT) and the underwriting fee (if applicable).

These requirements are usually expressed as conditions to cover under the policy. Failure to satisfy them can resultin the insured being "off risk", with the insurer entitled to treat the policy as void.

For an overview of how the process differs on a hard staple, see Hard staples: process variations.

Notifications and claims

Notifying a possible claim

W&I insurers expect that the insured will involve them as soon as reasonably practicable after the insured hasdiscovered a fact or circumstance that could give rise to a loss under the W&I insurance policy, such as receipt ofa third party demand. In practice, this will require the insured to provide a short notification to the insurer, MGA/MGU or consortium claims lead (as the case may be) after the insured has discovered a potential loss. This canalways be clarified with a supplemental claims notice at a later stage after the insured has ascertained more detailsof the loss.

From an insured's perspective, there is no downside to notifying a W&I insurer of a possible claim. W&I insurancepolicy notification obligations are often broadly drafted and it is always advisable that the insured should notify thepotential issue, if only to ensure that insurers cannot claim any defence under the late claim notification provisions.Larger broking houses have dedicated transactional risk insurance claims team who can assist the insured inpresenting its claim.

A claims notice generally does not differ from a breach of warranty notice under an SPA. Insurers expect the insuredto provide a detailed summary of facts and circumstances of the breach and the calculation of quantum in relation tothe loss along with any supporting documentation the insured has available. The claim notice should also whereverpossible identify the specific warranties that it alleges have been breached (in other words, it is important to checkthat these are covered warranties that have not been either excluded from, or re-written for the purposes of, thepolicy). Consider the principles established in case law regarding the notification of claims under SPAs such asStobart Group Ltd & Stobart Rail Ltd v Stobart & Tinkler [2019] EWCA Civ 1376 (see Legal update, Purchaser'sSPA tax claim out of time due to ineffective notice (Court of Appeal)).

By way of proof of loss on a breach of warranty in a share purchase agreement for example the insured will needto demonstrate a diminution in the value of the shares in the target. The prima facie measure of damages in such acase is the difference between the value of the shares (on the assumption that the warranty was true) and the actualvalue (see Checklist, Seller warranties and limitations on liability: commonly negotiated issues: share purchases:Remedies for breach of warranty and for a description of the position on business purchases, see Checklist, Sellerwarranties and limitations on liability: commonly negotiated issues: business purchases: Remedies for breach ofwarranty).

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Typically, there will be no requirement in the policy to also notify the seller under the SPA, though the buyer maychoose to do so to preserve other legal rights and remedies against the seller (particularly if there is uncertaintywhether the claim will be covered under the W&I insurance policy). Generally, see Checklist, The making ofinsurance claims. W&I insurer response

Following receipt of a claim notification, the W&I insurer will vet whether the alleged breach of warranty:

• Can be substantiated.

• Relates to a covered provision under the W&I insurance policy (in other words, it has not been partiallycovered or excluded, either expressly or by way of a general or specific exclusion).

• Was not fairly disclosed to the insurer on inception of the policy.

• Has led to a recoverable loss that is above the de minimis threshold.

The length of time that this takes can vary depending on the claim and its complexity. The insured should expectthat, in many cases, insurers will need to request additional supporting material or further information in order tocomplete their investigations. In some cases, outside counsel or experts may be appointed by insurers to assist themwith the investigation and analysis of the claim. This is perfectly normal, particularly in the case of complex claims. Defence costs

The majority of W&I insurance policies will cover the investigation, settlement and/or defence of third party claimsand connected appeals (excluding any remuneration of the directors, officers or employees, or any other internalcosts, of the insured), subject to the applicable policy retention. Such coverage will be dependent on gaining theprior consent of the insurer, although the policy will provide for "emergency defence costs" up to a specified limitwithout prior consent being required. However it should be noted that most W&I insurance policies do not coverthe investigation of first party breaches or the costs of the insured if cover is denied under the policy. Disputes

Not all notifications lead to claims and even valid claims may simply contribute to erode the retention.

Most valid claims under W&I insurance policies, like most valid claims under SPAs, are either resolved by agreementor settled out of court. Claims involving a tower of insurance, involving multiple insurers, can be particularlycomplex.

Settlement agreements typically contain confidentiality restrictions. Where liability is admitted by the W&I insurer,the agreement will provide that no further claims can be made either:

• For the same subject matter.

• Potentially for a larger claim, under the W&I insurance policy at all (in other words, it is in full and finalsettlement).





Claims experience

Publicly available information on W&I insurance claims data is relatively limited due to the use of settlementagreements and increased resort to arbitration. However, some W&I insurers do now publish annual or periodicclaims updates. These tend to identify the following themes:

• The most common causes of breach of warranty are in relation to:

• the financial statements, tax audits or tax assessments;

• material contracts (including disputes relating to invoices); and

• compliance with laws.

• W&I insurance claims are more likely on significantly larger EV deals (over £1 billion) though this may be acoincidence which has not been extracted from a representative sample.

• Most W&I insurance claims are notified within the first two years of the policy period (or soon following thefirst audit).

• Historically, sell-side policies have tended to attract more claims than buy-side policies.

As W&I insurance evolves, claims handling capability and a track record of paying claims at W&I insurers isbecoming as important a factor as pricing and coverage in deciding which insurer to choose.

Complementary insurance products

A standard buy-side policy is designed to cover only unknown issues in areas which have been the subject of duediligence. Bespoke cover may sometimes be available in respect of identified issues.

Examples include:

• Tax liability insurance. See Practice note, Tax liability insurance: dealing with tax risks in M&A and othercommercial transactions.

• Contingent liability insurance, for example in respect of:

• legal interpretation risk for identified litigation or arbitration (particularly appeal risks of favourablefirst instance decisions);

• intellectual property or employment disputes;

• specific accounting treatments; and

• other permitting and regulatory exposures.

Litigation buyout insurance for example is a specialised contingent risk insurance product which helpsclients manage risks arising from pending or threatened litigation.





For further information, see Article, Common issues in structuring insurance solutions for M&Atransactions: Differences between W&I, tax and contingent liability insurance policies.

• Title insurance (also known as legal indemnity insurance). This is a separate insurance covering title toassets and shares only and does not typically provide cover for the exact suite of fundamental warrantiesnegotiated in an SPA. Instead it provides standalone cover for good and marketable title, subject to the termsand conditions of the policy. If used in conjunction with a buy-side policy, it can attract a reduction in thepremium by taking the fundamental warranties outside the scope of the policy.

For discussions of:

• Cyber insurance, see Article, Cybersecurity: considerations for M&A practitioners.

• Different types of environmental insurance available, see Practice note, Environmental insurance.

Examples of recent W&I insurance-backed deals

Deal (date ofannouncement)

Type of sellers Target business orsector

Deal value

Studio Retail Groupplc's disposal of FindelEducation Limited (16 December 2019)

Listed company Supplier of resourcesand equipment toschools

£50 million

Bovis Homes GroupPLC's acquisitionof Galliford Tryplc's Linden Homesand Partnerships& Regenerationbusinesses (7 November 2019)

Listed company (and itsshareholders)

Housing andregenerationbusinesses

£1.075 billion

Future plc's acquisitionof TI Media Limited (30 October 2019)

Private equity Media publisher £140 million

WH Smith PLC'sacquisition of MarshallRetail Group HoldingCompany, Inc. (17 October 2019)

Private equity Travel retailer £315 million

London StockExchange Group plc'sacquisition of Refinitiv (1 August 2019)

Mixed including privateequity and ThomsonReuters Corporation(the owner of PracticalLaw)

Financial technology £22.3 billion





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See also Article, ECM trends report: 2019: Listing Rules transactions: Warranty and indemnity insurance.

Principal documents to be produced on underwriter review

To be provided by the M&A insurance broker:

• NBI report.

• Broker of record letter (if required).

• Engagement letter and Terms of Business Agreement.

To be provided by the proposed insured (and its external advisers):

• NDA or confidentiality agreement joinder. Whether using the seller's deal-specific NDA, thebuyer's preferred form, the M&A insurance broker's standard enquiry template or the W&Iinsurer's joinder, this should be in place from the outset. Insider list requirements may also apply(see Practice note, MAR: insider lists).

• Data room access. Access will need to be provided to all sections of the data room to both theselected W&I insurer and its legal advisers.

• Hold harmless and non-reliance letters. Sometimes required for the M&A insurance broker toreceive external due diligence reports; almost always required for the selected W&I insurer,particularly for tax and financial reports.

• Due diligence reports. Revised drafts should be provided as and when available, preferably with aredline showing any changes.

• Transaction documents (including specific disclosures). Revised drafts should be provided as andwhen available, preferably with a redline showing any changes.

• Underwriting responses.

To be provided by the W&I insurer:

• Expense agreement.

• W&I insurance policy draft ("front end", with coverage position to follow after underwriting call).

• Underwriting questions or call agenda.

Hard staples: process variations





• Auction draft transaction documents, bid process letter or Request for Proposal states sellerwarranty (and, if offered, tax indemnity) package is available only if buy-side policy is obtained.

• Seller engages M&A insurance broker. Broker produces a written NBI report summarising thebuy-side W&I terms from insurers for the seller.

• Seller selects insurer.

• Auction draft SPA, information memorandum, all VDD reports and data room access areprovided to selected insurer.

• Seller typically incurs an initial sell-side underwriting fee (usually expressed as a liability to bepicked up by the winning bidder) to enter into sell-side underwriting based upon sell-side VDD.

• Pre-underwriting with insurer on the sell-side.

• Advanced draft bespoke W&I insurance policy wording is made available to the preferredbidder(s), potentially significantly reducing the timetable to inception.

• The buyer must take the W&I insurance policy.

• A separate M&A insurance broker "clean team" is then introduced to the buyer (so-called "flip" tothe buy-side).

• M&A insurance broker clean team places the W&I policy on the buy-side and the coverageposition remains subject to confirmatory review of the buyer's due diligence.

END OF DOCUMENT

Resource History

New practice note under new authorship (April 2020).The note has been restructured and rewritten by new co-authors: Nicholas Lunn, Head of SouthernEurope, Liberty Global Transaction Solutions and Vanessa Young, Executive Director in the M&ATransactional Risks Team, Willis Towers Watson.

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Practice notesDisclosure: acquisitions • MaintainedTax liability insurance: dealing with tax risks in M&A and other commercial transactions • MaintainedWarranties and indemnities: acquisitions • Maintained

ArticlesRisk management and insurance: The in-house lawyer's perspectiveWarranty and indemnity insurance: a global reachM&A disputes: seller opportunism or buyer's remorse?A new creed for the tax deed: the impact of market trendsCovering the risks: warranty and indemnity insurance

Video and audioNotification of breach of warranty claims • Law stated as at 11-Sep-2018Assessing recoverable losses in business sale cases • Law stated as at 11-Sep-2018Warranties, indemnities and misrepresentation on a business sale • Law stated as at 11-Sep-2018









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Documents

Warranty and indemnity insurance - Liberty GTS Homepage · This note explains the key features of warranty and indemnity (W&I) insurance in the context of unlisted company and business