Warranty Insurance and Compensation in the Age of COVID – Insurance


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Guarantee and indemnity insurance1 has been a popular and effective tool to facilitate and support transactions for several years. COVID has of course affected every aspect of our lives over the past couple of years. Likewise, COVID has affected all transactions to some extent since the start of 2020. In many cases its effect has been significant and in some, particularly at the start of the pandemic, the risks involved.

However, after an initial slowdown in the second quarter of 2020 as the business world adapted to new ways of working and closing transactions, transaction volumes and cumulative value increased in the last six months of 2020. In 2021, global M&A deals hit a new record. high, both in terms of number of transactions and cumulative value. An abundance of capital, low interest rates and high levels of optimism about continued global economic growth suggest that the M&A industry will continue to be busy and competitive.

Against this backdrop, demand for W&I insurance has reached record levels and W&I insurance is expected to remain in high demand, not only to support transactions, but also to help competing buyers gain a competitive advantage.

Guarantee and indemnity insurance

A Sale and Purchase Agreement (SPA) will typically contain a set of seller guarantees covering all key aspects of the business being sold. Strong, well-drafted warranties will provide insight into the state of the target business and require the disclosure, in the Virtual Data Room (VDR), as part of due diligence, of key target information. The effect of a breach of one or more of these warranties will be that the buyer will have a claim for damages for breach of contract against the seller. Accordingly, the seller will seek to limit the extent of the warranties he gives while the buyer will seek to extend the warranties as much as possible.

W&I insurance can provide a unique solution to the concerns of sellers and buyers – by removing or limiting seller’s risk while providing protection for the buyer, whose recourse will be against the insurer rather than the seller. Although historically W&I insurance has been available in two forms, sell-side policies (where the seller is the insured under the policy) and buy-side policies (where the buyer is the insured), Buy-side policies have been more popular for a number of years and are by far the most prevalent in 2021. As part of W&I buyer-side insurance, coverage is provided to the buyer for financial loss or liability resulting from the seller’s failure to comply with a declaration or warranty in the SPA.

The advantages of guarantee and compensation insurance

W&I insurance can be used to support a transaction, by simply transferring the risk resulting from a breach of warranty from the seller to the insurer. It can be adapted to extend the guarantees the seller is willing to give to match those required by the buyer. It can give a buyer an advantage over other competing bidders by removing or limiting the extent of the seller’s risk through the guarantees given in the SPA.

With W&I insurance in place, a seller can properly withdraw from the business being sold, eliminating the risk of claims against him in the future and allowing him to distribute the proceeds of the sale while avoiding having to own money in escrow against the possibility of such claims. For the benefit of both parties, the insurer can intervene and offer guarantees acceptable to the buyer, beyond those that the seller was willing to give, both in their scope and in the duration for which they are granted, which will give the buyer more time to assess the acquired business and uncover potential issues that may lead to a claim.

For a buyer, this gains the security of an insurer being responsible for the financial consequences of a breach, rather than the seller, who may not be so financially secure. Again, having the insurer in place of the seller is advantageous for a buyer who may not want to sue the seller as it would harm the current relationship if the seller continues to play a role in the business, for example, continue to manage the business on behalf of the buyer. In addition, a buyer with W&I insurance, in a competitive auction process, is able to distinguish himself from other bidders by offering the prospect of no recourse or limited remedy against the seller for default.

Characteristics of the guarantee and indemnity insurance

Scope of guarantees and due diligence

While some provisions are common to all W&I policies, most policies will be subject to careful and detailed negotiation to tailor the policy to reflect the specific characteristics of the transaction and to meet the subjective demands of the seller and the client. the buyer. A W&I policy may cover some, but not all, of the warranties of the SPA and, as noted above, may cover the warranties on a modified basis rather than as drafted in the SPA. However, having a W&I policy in place is not a substitute for full due diligence. Insurers will expect, and will confirm by investigation, that the seller has provided proper disclosure, through a full and well-ordered VDR and full disclosure letter, and that the buyer has made due diligence, with appropriate questions asked and answered, and properly negotiated the terms of the SPA. The insurer will also conduct its own investigations and perform its own due diligence exercise.

Insurance period

The period of the W&I policy will generally extend from the signing of the agreement until the expiration of the guarantees and indemnities of the SPA. It is not uncommon to see a W&I policy cover a core warranty for seven years from completion with other warranties covered for at least three years from completion. As noted above, a buyer may seek to extend the time limitations of the SPA to meet the buyer’s requirements.

Retentions; de minimis

Many W&I policies will have retention paid by the insured, although some policies are written without retention and this will of course be reflected in the premium charged. Some W&I policies have a tip retention mechanism, whereby no claims are paid up to the limit of the tip retention amount itself, but, once one or more covered claims exceed the level of the tip retention, all covered claims are payable in full. Most policies reflect the value of the transaction in limits and retention and, therefore, in the premium of the policy. Many W&I policies will contain a de minimis provision excluding claims below this threshold, which may reflect the SPA’s approach.


Although coverage under a W&I policy is tied to SPA guarantees, certain guarantees will be excluded from all policies and other guarantees excluded from most policies. It is common to exclude claims relating to transfer pricing, tax obligations, pension underfunding, bribery / corruption and environmental issues. In addition, issues addressed in the disclosure letter, issues appearing in due diligence reports, transaction documents or VDR, forward-looking warranties, issues known to the buyer (on a purchase policy) and problems resulting from fraudulent conduct by the seller (on a sales policy) are also generally excluded. However, a purchase W&I policy will generally cover seller fraud.

As noted above, COVID has, to some extent, affected all transactions since the start of 2020. At the onset of the pandemic, full COVID / communicable disease exclusions were, at the very least, being considered by insurers. However, the level of COVID risk in any transaction is a subjective matter, depending on the nature of the business being sold, and the policy will be adjusted accordingly. In the quieter and booming market of 2021, while it is likely that any specific express guarantees related to COVID will be excluded from coverage under a W&I policy, it is just as unlikely as a blanket COVID exclusion. or communicable diseases appear in the policy.


Consistent with the basic principles underlying W&I insurance, in many cases a buy-side W&I policy will remove any risk to the seller, in which case the policy will also prohibit the insurer from exercising subrogation rights against the seller. , except in cases of seller fraud.

Knowledge qualifications

Often, certain guarantees will be based on, and limited to, the actual knowledge of certain specified persons in the target company. In these cases, insurers will require evidence of the breadth of knowledge of the appointees to assess a claim for breach of these warranties.

Warranty and compensation insurance claims; scope of damages for breach of warranty

Make a claim

Again, reflecting the fundamental principles underlying W&I insurance, most W&I policies do not require the assertion or initiation of a claim against the seller as a condition precedent to a claim under the police. W&I policies will generally have a full notification regime with notice of a claim to be given within a specified timeframe from the date the information forming the basis of the claim became known to the insured. The notice will usually need to be followed by a full statement of loss with supporting information and documents. Where guarantees relating to accounts and financial statements are the subject of a claim, it is likely that expert evidence will also be required.

The extent of damages for a violation

Under English law damages for breach of warranty are calculated on the basis that they will place the plaintiff in the position he would have been if the warranty had been true. So, when examining a transaction, the damages will reflect the difference between the value of the target business as collateral (usually the purchase price paid) and the actual value of the target business, i.e. with the broken warranty. In cases where the purchase price has been calculated by applying a profit multiplier, damages will be calculated by applying the same multiplier to the loss of revenue relating to the violation. If a claim on a W&I policy is based on the application of a multiplier, the insured must provide proof of the valuation model he used to determine the purchase price.


1.Also known as Transactional Insurance and in the United States as Rep[resentation]s & Guarantees Insurance

Originally posted by
Zeitschrift für Versicherungswesen.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.


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