Australia: Warranty & indemnity (W&I) insurance: what it is and why you should consider it in your next M&A deal

Services: Corporate & Commercial, Insurance
Industry Focus: Financial Services, Insurance, Life Sciences & Healthcare, Real Estate & Construction

What you need to know

  • Warranty & indemnity (W&I) insurance has become a key ingredient in M&A transactions but it may be a foreign concept to some, particularly those who are not experienced buyers or sellers of businesses.
  • Even those who have come across W&I insurance before may not fully understand the rationale and mechanics behind it.
  • It's important for all parties to an M&A transaction to be aware of why W&I insurance is taken out, how it works, how due diligence can impact policy coverage, and how this type of insurance is dealt with in sale agreements.

Why W&I insurance is taken out

Consider the position of the buyer of a business, entering into a sale agreement with the seller. The seller will make various representations about the business that will be underpinned with warranties and indemnities, all for the purpose of giving the buyer comfort about what they are purchasing.

Those warranties and indemnities may look great on paper, but what happens if there is a breach? What recourse will the buyer have if, weeks or months after the deal has closed and the parties have parted ways, a breach is uncovered?

If the buyer's only option is to bring a claim against the seller, it may be in a difficult spot if the seller does not have deep enough pockets to compensate the buyer. This complication will often arise where the seller has chosen to offload the business due to financial difficulty or, more commonly, where the seller is a private equity fund and has already distributed the sale proceeds.

This is where W&I insurance can come into play.

How it works

Under a typical W&I insurance policy, the insured party is covered for warranty and/or indemnity claims. It may be taken out in one of three ways:

  • By the buyer: It is most common for the buyer to be the insured party in a W&I insurance policy. If a breach were to occur, the buyer would make a claim under the policy for the amount to which it is contractually entitled under the sale agreement (subject to any policy exclusions) and that amount would be paid by the insurer directly to the buyer. The seller is rarely involved in this process.
  • By the seller: It is less common for the seller to take out W&I insurance although it does happen occasionally, where the seller seeks coverage for potential claims that the buyer might bring against it for a breach of the seller's own warranties or indemnities. If such a claim were to be brought, the insurer would pay the relevant amount to the seller who would then be liable to the buyer for the warranty or indemnity claim. It is not uncommon for a buyer to be unaware of the existence of the W&I insurance policy in this scenario. The disadvantage of this approach is that there is no insurance coverage for a seller where there has been seller fraud.
  • As a 'flipping' policy: In some cases a seller might obtain a quote for W&I insurance relating to an upcoming transaction, particularly if the seller intends to run a competitive bid process where offers are made by multiple potential buyers. Upon selecting the successful bidder, the policy which was initially quoted for the seller would be 'flipped' and taken on by the buyer as a condition of the sale proceeding.

Regardless of whether the insured is the buyer or seller, it is common for the seller to cover (or contribute to part of) the cost of the W&I insurance policy (that is, the premium). The premium is typically about 1.3% of the total cover limit – it's important to note that the cost of the premium is determined by a number of factors. Even if the buyer is the insured party, this still benefits the seller immensely, providing it with a 'clean exit' after the sale. Where the buyer is the insured, the cost of the policy is typically covered by a reduction in the purchase price.

Benefits of obtaining W&I insurance

W&I insurance carries several benefits for different parties with an interest in the sale of a business, the most common of which are set out below.

  • For the buyer: Where the buyer is protected by a W&I insurance policy, it can obtain a higher degree of certainty that a legitimate loss arising from a breach of warranty or indemnity will be recoverable, regardless of the seller's financial position at the time the claim is made.
  • For the seller: The existence of a W&I insurance policy allows the seller to take the proceeds of the sale without further exposure to warranty or indemnity claims following completion of the sale.
  • For both buyers and sellers: Where a seller remains involved in the company post-sale, such as by staying on as a shareholder, employee or in management, a W&I insurance policy can protect the parties' ongoing relationship.
  • For other stakeholders: Where the seller is a private equity fund, the internal rate of return to its investors will be increased by the funds being distributed on completion.

Importance of due diligence

Coverage under a W&I insurance policy is negotiated between the insurer and the insured party which, as noted above, is most often the buyer. During that negotiation process, some warranties and indemnities may be excluded from cover.

First, when providing a quote for the policy, an insurer may indicate that particular warranties or indemnities are excluded. It is generally accepted practice that W&I insurance policies will not insure known issues or known risks.

Second, the insurer will want to ascertain the level of the insured's knowledge of the target's operations and risks, during what is known as the underwriting process. Since an insurer's interests tend to be aligned more with those of the seller, in an effort to reduce its obligation to make payment under the policy, the insurer will usually require that the insured undertakes comprehensive due diligence to increase its knowledge of the target business or company. Insured parties who conduct limited due diligence of a target, have a higher materiality threshold, or conduct an 'exceptions only' due diligence investigation, are more likely to experience greater scrutiny during the underwriting process.

As a result of the insurer's scrutiny of due diligence undertaken on the target, a W&I insurance policy may contain exclusions based on:

  • an insurer's finding that the due diligence has not been comprehensive
  • the insured being aware of any fact, matter or circumstance that was disclosed during the insured's due diligence investigations – on this issue, it's common for a sale agreement to define what constitutes disclosure to include information that is actually disclosed (for example in a data room) or deemed to be disclosed (information publicly available)
  • the insurer's finding that although a comprehensive due diligence process has been undertaken, issues raised have not been resolved.

Impact on sale agreements

Where the buyer is the insured under a W&I policy, the sale agreement will typically specify that completion of the transaction is conditional upon the buyer entering into the policy with the insurer. Where such a condition exists, the buyer usually agrees to provide the seller with a copy of the policy.

W&I insurance policies can come into effect at one of two times:

  • On completion of the transaction, where the policy generally only covers completion warranties and indemnities. This then raises questions about what happens if a breach occurs after the transaction documents have been signed but before the deal has completed. A prudent buyer would not to agree to sole recourse language (that is, where the sale agreement specifically refers to claims being made only against a W&I insurance policy and not against seller, despite a breach of a seller's warranty or indemnity) unless the seller agrees to stand behind the warranty in the period between signing and completion. A buyer may seek additional protection by negotiating the right to terminate the sale agreement for a breach of warranty or indemnity prior to completion.
  • On signing of transaction documents, where the policy generally covers signing and completion warranties and indemnities. In some circumstances the insured may want the W&I policy to cover breaches in the earlier period between signing and completion. Insurers may agree to provide such policy cover, but apply a mark-up to the policy premium and limit the cover to a set period of time, for example for 30 days during the period between signing and completion.

The financial limitations and time limitations relating to warranty claims in the sale agreement will usually mirror the W&I insurance policy. If the buyer secures a W&I insurance policy for amounts and timeframes in excess of those set out in the sale agreement, and similarly where the seller is the insured under the W&I policy, this can have little to no impact on the sale agreement. On the other hand, in the unusual event that the seller agrees to provide cover for amounts and timeframes greater than those set out in the buyer's W&I insurance policy, a prudent buyer would require the removal of sole recourse obligation for these claims.

Key takeaways

It is important for both buyers and sellers involved in M&A transactions to understand the general role that W&I insurance can play and how they may stand to benefit from securing a policy. But because the specifics of a W&I insurance policy will always depend on the circumstances in which it is taken out, and the nature and results of due diligence conducted, seeking advice on W&I insurance in a particular transaction is always a good idea.

This article is intended to provide commentary and general information. It should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this article. Authors listed may not be admitted in all states and territories

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions