Warranty and indemnity insurance (W&I
Insurance) continues to be an increasingly common
instrument used by merger parties to manage deal risk in Australian
In broad terms, W&I Insurance involves the underwriter
indemnifying the insured for any loss arising out of a breach of
warranty or a claim under the tax indemnity in the relevant sale
and purchase agreement. The insured can either be the buyer (a
"buyer-side" policy) or the seller (a
"seller-side" policy) but will most often be the buyer.
Both policies will also cover reasonable legal costs incurred by
the insured in defending certain claims.
We expect that buyer-side policies will continue to dominate
whilst M&A parties are willing to structure the transaction and
policy to ensure that there is little or minimal residual liability
for the sellers. Under a buyer-side policy, the insurer waives its
right to subrogate against a seller other than in the case of a
seller's fraud and an insured buyer will also typically agree
not to make a claim against the seller for an insured matter.
While the market for W&I Insurance has evolved rapidly over
the last 5 years, there is still a great deal of expertise required
to underwrite this product. Underwriting teams are inevitably
advised by experienced M&A practitioners from leading law firms
to familiarise underwriters with the process and structure of an
M&A transaction to properly assess risk.
Policy documentation is also becoming more standardised but is
still evolving gradually to reflect changing M&A trends and
risk appetites in the market. Each policy also has to be tailored
to reflect the particular terms of each transaction and there is
always scope for some negotiation of policy terms with insurers
depending on the needs of the insured.
Whilst other forms of transaction liability insurance (eg.
environmental liability insurance, litigation insurance, tax
liability insurance, contingent risk insurance and prospectus
liability insurance) are available, they are usually separate and
distinct from the cover available under a W&I Insurance policy
and have not gained as much traction in Australia as the W&I
Australia is seen globally as an attractive growth proposition
for the transaction liability insurance market, particularly
because of its relatively high M&A deal flow (by number and
value), continued strong economic growth, low geo-political risk
and its robust legal system. This, combined with strong market
penetration, awareness and acceptance of the W&I Insurance, has
led to the Australian market for this product being roughly similar
in size to the UK market, and has meant that the Australian market
has become a focus for brokers and insurers/underwriters
specialising in these transaction risk insurance products.
As a result, we have seen a marked increase in the number of
international brokers and insurers/underwriters seeking to
participate in W&I Insurance deals in Australia in the last 12
months. Given the up-take of the product in Australia, many
international brokers and insurers/underwriters have also decided
to send experienced team members to Australia to establish a
physical presence to enable them to more properly service the
Australian M&A market.
The market for W&I Insurance in Australia continues to
remain competitive, particularly as a result of the increased
competition between brokers and insurers/underwriters. The effect
of this has been that:
premium costs have decreased significantly over the last 5
years, presenting an even better value proposition for a potential
insurers/underwriters have been willing to offer greater
flexibility in the policy wording and insurance coverage being
provided (eg. full or partial tipping retention structures, cover
for specific indemnities or specific known issues and more limited
exclusions from policy coverage).
While competition is still increasing, we expect that there is
very little room for further depreciation in premium costs and we
think that the increased competition is instead likely to drive
further product innovation.
Based on our experience, we expect the use of W&I Insurance
to increase further as the product continues to become more widely
known and accepted beyond the private equity industry which was,
and still is, the biggest buyer of the product. In particular, we
are seeing strong growth in take-up of the product by corporates,
particularly those involved in cross-border transactions.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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The failure of a party to call a witness does not necessarily give rise to an adverse inference being drawn in accordance with Jones v Dunkel (1959) 101 CLR 298. An unfavourable inference is drawn only if evidence otherwise provides a basis on which that unfavourable inference can be drawn.
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