Parties on either side of an M&A transaction have opposing interests when it comes to negotiating warranties and indemnities: a buyer wants to secure a comprehensive set of warranties and in some cases a tax indemnity from a seller, whereas a seller wishes to minimise its tail of exposure after completion of the transaction to achieve a clean exit.
Warranty and indemnity insurance (also known as representations and warranties insurance) (W&I Insurance) has been a feature in M&A transactions globally for some time, bridging the gap between the parties' competing needs. It is currently one of the hottest topics for discussion with our transactional clients and contacts.
A sell-side policy will involve the seller seeking cover for liability arising from a breach of insured warranties and indemnities, subject to exclusions agreed with the insurer (which will include fraud on the part of the seller). A buy-side policy involves the buyer seeking cover for liability that would arise for the seller from a breach of insured warranties and indemnities but for a reasonably standard waiver of liability set out in the Sale and Purchase Agreement. It is very common for the buyer and seller to agree that the buyer's rights in the event of a breach of warranties or indemnities is limited to recourse under the W&I Insurance and it waives all rights against the seller in relation to such breach (subject to very limited exceptions including fraud). Accordingly, both buy-side policies and sell-side policies can benefit the seller and the premium is therefore often paid or shared by the seller, or deducted from the purchase price.
Initially favoured by private equity firms looking for a clean exit from an investment, W&I Insurance is rapidly becoming mainstream with insurers increasingly being asked to provide W&I Insurance on non-private equity transactions, on a wide array of transaction structures and asset classes, and to both sellers (sell-side policies) and buyers (buy-side policies). As a result, the W&I Insurance market in Asia Pacific has become extremely competitive with a number of new insurers entering the market. This competitiveness is causing cleaner policies that are subject to fewer exclusions and exceptions, and premiums remain low in New Zealand relative to pricing in most other jurisdictions.
DLA Piper has ranked #1 globally by overall M&A deal volume for 6 years in a row in merger market's league tables for legal advisors. We also act for insurers on W&I insurance transactions in many jurisdictions, including New Zealand and Australia. This provides us with a front row seat to global trends in M&A. Some of the trends we are seeing in W&I Insurance are as follows1:
- Over 90% of W&I Insurance taken out are now buy-side policies with cover ranging from 100% down to 2% of the purchase price. Smaller deals are more likely to have insurance for 100% of the purchase price, with larger deals typically taking cover for a lesser percentage.
- W&I Insurance is used most frequently in larger deals when the deal size can carry the insurance premiums. In New Zealand, our experience is that W&I Insurance will become difficult to justify in terms of the premium where the insured risk drops below NZ$20 million.
- Trade buyers take out buy-side policies more commonly than private equity buyers do. Unsurprisingly, where private equity is the seller the buyer more commonly takes out buy-side policies than when the seller is trade or individuals. In many cases this will be because the private equity seller will require (as an important term of the sale) that the buyer takes out a buy-side policy in order to provide the private equity seller with a clean exit.
- Although W&I Insurance is discussed, assessed and even priced on many deals it is still used in only a minority of them. Deals incorporate W&I Insurance at an infrequent rate, although it is discussed, assessed and even priced in many deals.
We have a wealth of experience acting for sellers, buyers and insurers where W&I Insurance is employed. If you want to know more about W&I Insurance generally or in relation to your transaction, contact one of our experts or see our Tip Sheet.
1 Statistics are taken from approximately 500 deals from Europe, North America and Asia Pacific.