This article will provide a brief overview of W&I insurance, which is commonly used in the process of putting a policy in place. It will summarize the circumstances in which W&I insurance is most commonly used. In recent years, W&I insurance has steadily become more prevalent in corporate M&A (mergers and acquisitions) transactions.
Through careful investigation, the guarantees can serve as a means of collecting information about the objective, and confirming what it has already uncovered. If the purchaser experiences a loss following the acquisition due to any of the guarantees being false, the purchaser has a legal entitlement to file a claim against the seller. Guarantees are factual statements about the company at the time of completion, and typically, a seller must offer commercial and tax guarantees to the purchaser in an M&A transaction.
In some cases, disagreements between parties during negotiations can result in the termination of transactions and a significant divergence in their positions. This can be attributed to the allocation of risk and differences in outlook. As a result, buyers will typically try to obtain an extensive list of warranties, while sellers will seek to limit their liability by building and limiting the scope of this list in the relevant transaction documents.
Insurance and indemnity warranty is a specialized product designed to provide coverage against financial losses that may arise from a breach of tax indemnity or warranty in the context of a corporate M&A transaction. Therefore, it can be a very useful tool for aligning the expectations of the seller and buyer in seeking liability post-acquisition.
The negotiation between the parties typically involves the payment of the premium, which is generally up for negotiation by the buyer. The buyer is purchasing policies, and there is a growing trend of marketing sell-side products as a means to offer sellers a sense of security when it comes to exiting, while initially W&I insurance was designed for a different purpose. W&I policies can be categorized as either buy-side or sell-side.
A purchaser may wish to obtain the policy under the subsequent situations:.
In lieu of a seller, it is logical for the purchaser to procure the policy. The party that is insured is the purchaser, who has the ability to file a claim promptly upon the occurrence of a warranty or indemnity breach. Nevertheless, if the policy is obtained by the seller, the purchaser is obligated to initiate its claim against the seller initially. Subsequently, it is the seller who lodges a claim with the insurance provider regarding the breach. There is also a pragmatic rationale behind this approach.
Notwithstanding the prevalence of buy-side policies as outlined above, sellers may still want to take out a policy for the following reasons:.
At a preliminary phase of the transaction, the party acquiring the insurance is strongly recommended to initiate conversations with its broker, and consequently it can generally take approximately 2 to 3 weeks to place a policy at risk. While these insurers are now knowledgeable about the procedures involved, there is now a notable amount of specialized M&A insurance brokers who can offer guidance on, and oversee, the provision of W&I insurance.
Generally, the price of the insurance consists of a premium that needs to be paid when the policy is exposed to risk, along with insurance premium tax, which accounts for 12% of the premium for a UK insured individual. The premium amount may differ based on the transaction, but on average it falls between 0.9% and 1.5% of the total coverage.
An insurer can acquire information about potential risks and the extent of thorough investigation done from the due diligence team to ensure a sense of security. The insurer and its legal representatives may inquire further with the buyer’s due diligence team through written communication or during an underwriting call. The insurer and its lawyers will need to examine the relevant sales agreement, the seller’s disclosure letter, and the essential transaction documents, which encompass all the due diligence reports prepared on behalf of the buyer.
Policy scope falls within the claim, insured will be responsible for ensuring that all material information was provided to the prior insurer, including transaction documents and agreed limitations. The policy will typically note limitations that mirror the limitations in the transaction documents and include different risks, such as known exclusions, secondary tax liabilities, transfer pricing risks, and certain tax risks. It will also cover claims arising from fraud, dishonesty, or pensions.Output: The claim that falls within the scope of the policy, the insured will bear the responsibility to ensure that all relevant information was provided to the previous insurer, including transactional documents and agreed-upon limitations. The policy typically reflects the limitations outlined in the transactional documents and encompasses various risks, including common exclusions, secondary tax liabilities, transfer pricing risks, and specific tax risks. It also provides coverage for claims arising from fraudulent activities, dishonest behavior, or pension-related issues.
In the Sales and Purchase Agreement (SPA), the timeframe specified for the restriction will typically commence upon completion, once the terms of the policy are finalized. Nevertheless, it is feasible to discuss an alternative timeframe within the policy.
Depending on the deal parameters and the scope of the exclusions policy, it is important to understand that insurance W&I can be a helpful product in managing the risks between parties, but it is not a complete solution for all risks.
If you require any additional details or guidance regarding corporate law, feel free to reach out to Kathryn Laverty. from the Corporate department at Carson McDowell LLP.
This information is intended only for guidance purposes and should not be considered as a substitute for customized legal advice that is relevant to your specific situation.
About the author
Kathryn Laverty.
Associate.
Kathryn Laverty. is an Associate. in the Corporate team at Carson McDowell. Kathryn advises clients in a wide range of industries and sectors across the full spectrum of corporate and commercial matters. These include mergers and acquisitions, equity investment, joint ventures and collaborations, reorganisations and restructuring, non-contentious intellectual property, shareholder arrangements and corporate governance.