Warranty & Indemnity (W&I) policies are a relatively new product introduced in the last decade, with the general principle being to cover warranties and risks in connection with company acquisitions. Private equity companies are often behind mergers and acquisitions (M&A), and W&I insurance can play an important part in their business models.
Benefits of covering a transaction
By taking out a W&I policy, the seller of a company limits its liability for the financial, tax and legal risings arising out of the sale. This is a crucial issue for private equity because, without W&I insurance, they cannot gain immediate access to the greater part of the sales proceeds. W&I policies can be the mechanism that delivers the desired ‘clean exit’.
The buyer of the company also benefits from greater protection for their investment: the protection survives the warranty period in the Share Purchase Agreement (SPA), so the insurance can last for several years. As a result, the placing of the W&I policy can create a feeling of confidence on each side of the deal; to this end, it can be a real deal-maker!
But W&I insurance is not just suited to larger transactions; an owner-manager holding shares in a company being sold can limit their liability for a breach of a warranty that they give about the business under the acquisition agreement, or free up sale proceeds that may otherwise be tied into an escrow account or other monetary ring-fencing mechanism. If the manager is continuing with the business post-acquisition, they can get on with their job without worrying about the possibility of being pursued by their new boss.
A W&I policy can be affected either by the buyer or the seller
Premiums and Excess Levels
W&I insurance has historically been seen as an expensive product, but with the increased and ever-growing competition in the market, rates have been driven down and premiums are now typically between 1% and 2% of the policy limit and even lower for property transactions. Therefore, premium amounts are generally minimal in the context of an M&A transaction.
Article courtesy of Stackhouse Poland. The opinions expressed by third parties are their own are not necessarily shared by St. James’s Place Wealth Management.
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