Warranty & Indemnity (“W&I”) Insurance is a tailored insurance product to cover breaches in representations and warranties given in the sale of a business. Sellers can cover themselves to prevent sale proceeds being tied up in escrow accounts. Buyers can ensure the warranties have real value even if the seller is unable to pay a warranty claim which arises some time in the future.
The policy, whether seller-side or buyer-side, will indemnify the insured for loss resulting from a breach of warranty or tax deed/covenant in a Sale and Purchase Agreement (SPA). A seller-side policy covers the seller for its own innocent misrepresentations; a buyer-side policy covers the buyer against the seller’s misrepresentations (innocent or otherwise). The buyer claims directly against the insurance policy and does not have to seek recourse against the seller.
The policy will be tailored in each case to offer broad coverage that matches the representations and warranties in the SPA as closely as possible. Consequently there will be little difference between what could be claimed against the seller pursuant to the SPA and what the seller (or the buyer as the case may be) can claim against the W&I policy
The policy term will generally run from signing of the deal for the full survival periods of the warranties and indemnities in the SPA. The period for a buyerside policy can extend the limitations prescribed in the SPA to meet the buyer’s needs.
Although cover is tailored in each case to match the warranties specific to the transaction, some issues will be excluded on all policies. These will include matters set out in the disclosure letter or due diligence, pension under-funding and on a sellerside policy, fraud by the seller.