Warranty and Indemnity (W&I) insurance is a contract for a buyer or seller to transfer risk of financial loss from a breach of the seller’s warranties and indemnities in a share or asset sale agreement.
Why use it?
W&I insurance is a cost-effective alternative to the traditional means of addressing transaction risks such as purchase price adjustments, escrows, hold-backs or parent company/bank guarantees. Motivations for utilising W&I insurance include:
- Achieving a “clean exit”: Financial sponsors such as private equity, real estate and infrastructure sellers are able to close their funds post disposal without the need to provision for future breach of warranty and indemnity claims.
- Enhancing a bid in a competitive auction: Bidders can accept minimal caps on liability from seller whilst secure increase protection for longer periods using a W&I policy.
- Maintain harmony with management: Buyers can rely upon their ability to claim under the W&I policy rather than pursuing management of the target or fellow shareholders.
- Provision of debt: Prospective financiers and lenders will typically insist on the buyer obtaining warranties so that it has some element of protection if issues are discovered post-completion. If the seller is an investment fund, they are unlikely to want to stand behind their warranties. The proceeds of a W&I policy claim can be assigned to the lender.
- Credit Risk: Buyers can rely on any claims being met by a financially secure insurer rather than taking credit risk from a seller.
Process
1
Phase 1
· Provide high-level deal information for an initial view on the insurability, likely pricing and any potential concerns W&I insurers may have.
· Minimum Information required: deal size, sector, jurisdiction.
· RCA will prepare an Initial Discussion Paper giving likely indicative pricing range, sector-specific commentary and best practice tips for strategic use of a W&I insurance policy, and current market appetite.
2
Phase 2
· Provide further deal information – a draft SPA, Information Memorandum or management presentation and company accounts.
· Discuss potential warranty liability regimes and appropriate insurance structures.
· RCA reviews the documents, discusses the transaction and client requirements with all suitable W&I insurers and obtains Non-Binding Indications (“NBI”) from prospective e W&I insurers.
· An NBI details a W&I insurer’s indicative pricing, comments on warranties, comments on areas of particular underwriting focus, potential exclusions and responses the RCA’s requests for certain overage enhancements.
3
Phase 3
· RCA discusses NBIs with W&I insurers and produces a comprehensive Heads of Terms report.
· The Heads of Terms contains a summary of the terms provided by W&I insurers, a discussion of issues raised and pros and cons of the NBIs, and a reasoned recommendation of which W&I insurer to work with.
· Client selects a W&I insurer.
4
Phase 4
· Insured signs a W&I Insurer’s expense agreement.
· RCA liaises with insured and insured’s advisors to secure VDR access for RCA and W&I the insurer, due diligence reports, and transaction documents.
· RCA and W&I insurer review due diligence reports.
. W&I insurer issues draft W&I policy and the first tranche underwriting questions.
5
Phase 5
· Insured provides responses to the first tranche of underwriting questions.
· RCA reviews responses before providing to the W&I insurer, together with updated drafts of the transaction documents.
. RCA liaises with insured and the W&I insurer and to respond to due diligence findings, commercial negotiations and W&I insurer’s underwriting findings.
. W&I Insurer issues tranche two underwriting questions.
. RCA reviews, advises on and negotiates W&I policy with W&I insurer.
. Insured provides responses to tranche two underwriting questions.
. Underwriting call for insured, insured’s advisors, the W& insurers and their outside counsel.
6
Phase 6
· Finalisation of W&I policy.
· Provision of final underwriting information to W&I insurer.
· Provisions of final transaction documents to W&I insurer.
· Execution version W&I policy ready for signing of the insurerd transaction.
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