When buying or selling a business, one of the most negotiated points is the package of warranties and indemnities (W&I). It’s also often the area where buyer and seller expectations differ the most.
Buyers typically want broad, unqualified warranties to ensure that if something unexpected surfaces post-completion, they can seek recourse. Sellers, on the other hand, usually try to limit those promises as much as possible to reduce their exposure.
This natural tension is where W&I insurance can help smooth the path to a deal.
What is warranty and indemnity (W&I) insurance?
W&I insurance is a specialist insurance product used in private M&A transactions, most commonly in higher-value deals running into several million pounds. It is designed to protect against financial losses arising from a breach of warranties or indemnities given in the sale agreement.
Although W&I cover was initially designed with sellers in mind, today it is predominantly buyer-focused while often allowing sellers to exit cleanly without significant ongoing liability.
Benefits of W&I insurance
W&I insurance can help bridge the gap between what buyers want and what sellers are comfortable offering. Key benefits include:
- Deal certainty: Buyers gain comfort knowing an insurer backs the warranties if something goes wrong.
- Clean exit for sellers: Sellers have a clean exit with a reduced risk of exposure to liability.
- Covenant strength concerns removed: If the seller’s financial standing is uncertain, insurance can provide a level of comfort for buyers.
- Preserves relationships: Useful where buyers are reluctant to claim directly against sellers who will remain involved post-completion.
Limitations and considerations
A misconception is that W&I insurance policies cover known issues; however, this is not the case. The standard buyer-side policy is designed to cover only unknown issues in areas which have been the subject of due diligence and any areas which the insurer has agreed to cover.
Typical exclusions include:
- Known issues identified during diligence
- Buyer fraud
- Purchase price adjustments
- Secondary tax liabilities
- Pension underfunding
Of course, as with any insurance policy, there will be deal-specific exclusions. These could include specific indemnities, forward-looking warranties, warranties relating to adequacy or sufficiency and areas that should be covered by existing insurances.
Is W&I insurance essential?
Whether W&I insurance is essential is linked to the specific deal; one downside is that it can be costly, however, it can be worthwhile in mid-market and large M&A transactions where W&I insurance has increasingly become a deal-making tool. It is considered crucial for mitigating risk and facilitating deals by transferring liability to an insurer.
It’s important to note that insurers still require appropriate due diligence as a condition of offering cover. Insurance does not replace diligence; it supports it.
Alternatives and risk mitigation tools
If W&I insurance isn’t appropriate, buyers and sellers sometimes turn to contractual protections such as:
- Escrow or retention accounts: A portion of the purchase price is held back for a period to cover potential claims.
- Enhanced due diligence: The most effective way to uncover and address risks early.
- Robust legal support: Experienced advisors can ensure warranties, indemnities, and disclosures are properly structured to reduce uncertainty.
About the author
Zarenna Porter is a solicitor in the Corporate and Commercial department. Her work spans a wide range of corporate and commercial matters, including acquisitions and disposals, share buybacks, company reorganisations and the drafting and negotiation of commercial contracts and agreements. She has supported businesses operating across different sectors, tailoring her advice to suit the distinct needs of both sole traders and larger corporate entities.