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Transactional Risk
Warranties and Indemnities Insurance

4 August, 2020

Creating Opportunities from Uncertainty

In a world of economic volatility businesses are increasingly looking at inorganic opportunities such as mergers and acquisitions (M&A) as a means of strategic growth. Competition for healthy assets will only continue and with it will come financial risk inherent in every M&A transaction.

M&A risk transfer solutions are available from the insurance market and Austbrokers Corporate is well placed to assist you with engaging specialist insurers. We have the expertise and experience to find the optimum outcome tailored to your specific M&A transaction.

Warranty and Indemnity (W&I) Insurance is now commonly used by both buyers and sellers in the M&A market as a method of reducing and/or transferring transaction risk to improve a bid and maintain key relationships throughout the process. The warranties are provided by the target, vetted by the bidder and underwritten by the insurer.

Mergers and Acquisition Risk

Traditionally during trade negotiations buyers will conduct due diligence on a target and rely on contractual warranties or indemnities provided by the seller in a sales agreement. Financial losses may arise from unintentional and unknown breaches of seller warranties once a deal is closed. W&I insurance is specifically designed to respond to such unforeseen losses.

W&I will augment an arms-length negotiated purchase by providing the policyholder with protection against liabilities that could damage the value of a business, the target being acquired or the proceeds from the sale.

According to the Corrs Chambers Westgarth M&A Trends Report for 2020, W&I insurance is becoming increasingly common in public M&A including on large and significant deals. This should come as no surprise given a recent Minter Ellison article (https://www.minterellison.com/articles/w-and-i-insurance-on-the-rise-in-public-m-and-a) noting that 21% of global W&I Insurance policies written in recent years have responded to a claim. We believe an increasing number of bidders will include this insurance solution as part of their M&A transaction in the future.

What is Warranties and Indemnities Insurance?

The product will cover the policyholder for a financial loss arising from a breach of the warranties or indemnities under a sale agreement. Bidders or sellers can take out tailored policies typically structured as follows:

Bidders (Buyers): The insurer will reimburse the buyer for losses from claims without first pursuing a recovery from the seller. The main benefit of a buyer policy is the protection beyond the negotiated indemnity caps of a sale agreement. Buyer policies may cover areas of fraud as the insurer retains recovery rights against the seller.         

Sellers: The insurer will reimburse the seller for losses from claims made by the buyer. The main benefit of a seller-side policy is that the insurance will provide a backstop for warranty obligations for private equity and venture capital funds. Note that seller policies generally won’t cover fraud.  

How is a Policy Structured?

  • The policy coverage is typically a dollar amount equal to 10% of the M&A purchase price.
  • There will be a deductible amount under the policy that is excluded from coverage (the “retention”), typically a minimum of 1% of the M&A purchase price.
  • There are “standard” exclusions to coverage; for example, the insurance may not cover covenant breaches by the seller or purchase price adjustments, known issues or consequential loss. There may be specifically tailored exclusions based on the results of the insurer’s own due diligence/underwriting.
  • The policy term is typically for 3 to 6 years, to be negotiated with the insurer.

Regulatory Risk in Transactions

Managing regulatory risk remains a key issue particularly in larger transactions. This is because sizeable transactions are more likely to involve sensitive foreign investment issues, or market concentration concerns, and also attract additional attention from corporate regulators, including the ASX and ASIC. Ask us how your other financial and professional policies such as Directors’ & Officers’ Liability insurance may protect you and your business and the personal assets of your directors in parallel with transaction specific W&I insurance.

Please talk to Austbrokers Corporate about W&I insurance for your specific M&A transaction. Contact personnel are as follows:

Simon Spencer (Sydney)
Level 3, 7 Macquarie Place
Sydney, NSW, 2000
0432 688 349

Kris Ekeberg (Melbourne)
Level 2, 99 William Street
Melbourne, VIC, 3000
0401 792 750 

Steve Pickett (Brisbane)
Level 22, 345 Queen Street
Brisbane, QLD, 4000
0410 478 123