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05 September 2018
What is W&I insurance?
What amount can be insured?
What premium and excess/policy retention is standard?
How long will the policy last?
What are typical policy exclusions?
How is a policy obtained and cover arranged?
Driven by private equity sellers seeking a clean break and no post-closing liability for a breach of business warranties or under a tax covenant, and by buyers requiring a source of meaningful financial recourse, warranty and indemnity (W&I) insurance is now a common feature of most private M&A transactions governed by English law.
W&I insurance provides cover for losses discovered by a buyer post-closing arising from a breach of warranty or, in certain cases, under an indemnity such as a tax covenant. W&I insurance aims to offer back-to-back cover for any liability arising from a breach of warranty or for liability under an indemnity, in each case where the matter giving rise to such a claim has not been fairly disclosed or was unknown to the insured party.
In addition to providing cover for customary warranties and indemnities, insurance coverage can also be put in place for specific tax liabilities and non-tax liabilities or one-off risks.
Subject to sufficient capacity in the insurance market, cover is available for up to the full amount of consideration under a share purchase agreement if required (up to a London market capacity level estimated to be approximately £1.1 billion). However, typically, buy-side policies – those taken out by a buyer with an insurer – provide cover in the range of 10% to 50% of the enterprise value of the target.
Net insurance premiums on transactions covered through the London insurance market are typically between 1% and 2% of the insured limit. The premium is payable in full for the entire period of the policy from when it is taken out or shortly thereafter.
In addition to the premium, UK-domiciled insureds must pay insurance premium tax at 12% of the total premium. Other additional costs include the underwriters' due diligence or external legal fees and any brokers' fees.
In general, insurers will require that the insured party bears an excess of at least 1% and possibly up to 2% of the enterprise value of the target at their own risk before the insurance policy attaches. Typically, the policy excess operates after erosion of the minimum claims limitations (the de minimis and basket) negotiated under the share purchase agreement.
Notwithstanding this, insurers are increasingly offering cover with a £1 attachment point and are happy to consider writing out of a W&I policy those limitations that might ordinarily be found in a share purchase agreement.
However, irrespective of the period of potential liability under the warranties or indemnity in the share purchase agreement, a buy-side policy can usually be written to provide insurance for two years post-closing for business warranties and seven years post-closing for tax warranties or a tax covenant.
A longer policy duration will generally result in a higher insurance premium.
Typically, policy exclusions include:
The process for obtaining cover can be broken down into the indicative stages and timescales, with an overall timetable of approximately 10 to 18 business days, as set out below:
Notwithstanding this, the insurance process can be completed in a matter of days if a buyer has substantially completed diligence and is familiar with the requirements of the underwriting process and the transaction and related risks to be covered are more straightforward.
For further information on this topic please contact Will Pearce or William Tong at Davis Polk & Wardwell London LLP by telephone (+44 20 7418 1300) or email (firstname.lastname@example.org or email@example.com). The Davis Polk & Wardwell website can be accessed at www.davispolk.com.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
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