Ireland: What Role Does Warranty And Indemnity Insurance Play In The Irish M&A Market?

Last Updated: 25 March 2019
Article by George Brady and Cáit Murphy

Introduction

One of the more interesting aspects of any M&A transaction is seeking to close the gap on the allocation of risk between a seller and a buyer. Typically, in a share or asset purchase agreement, a buyer will want the warranties to be as far-reaching and broadly drafted as possible whilst a seller will seek to limit the scope of the warranty language so as to reduce the likelihood, and financial consequences, of a warranty claim.  The warranty and indemnity ("W&I") insurance market which seeks to bridge this gap has become increasingly popular in the Irish M&A marketplace in recent years with the proportion of parties opting to employ W&I insurance steadily increasing.

W&I insurance has the advantage of benefiting both parties to a M&A transaction by allowing for any potential liability arising out of a breach of warranty and/or indemnity to move away from the parties involved to the insurance provider. It can facilitate greater deal protection for the buyer and help to achieve a seller's desire for a clean exit post deal by avoiding any overhanging liabilities.

Some of the primary reasons for employing a W&I insurance policy, depending on the nature or terms of the transaction, include (i) allowing a seller to obtain a clean exit from the target business or to immediately unlock a greater proportion of its sale proceeds; (ii) reducing or removing the need to place any funds in escrow; (iii) enabling a buyer to avoid bringing warranty claims against a seller who remains with the management team of the target business; and (iv) providing a buyer with a strategic advantage in the context of an auction process, by reducing the seller's exposure and thus enhancing the value of the buyer's bid.

What is W&I Insurance?

W&I insurance is a bespoke insurance mechanism which is triggered by a breach of warranty or indemnity (and, in certain cases, other equivalent provisions) in M&A transaction documents, and which responds by providing cover for any financial losses incurred. A W&I insurance policy can be structured to indemnify either the warrantor/seller (under a seller insurance policy) or the buyer (under a buyer insurance policy). At the moment, we find the most common type of policy is the buyer-side policy.

Key Features of W&I Insurance Policies

A W&I insurance policy is structured as a claims-made policy whereby the insurance provider effectively 'steps into the shoes' of the seller or warrantor. Each policy is bespoke and tailored to reflect the specific transaction requirements and terms of the underlying acquisition documents, the objective being that the policy provides full back to back cover and avoids any unexpected gaps in protection.

A typical W&I insurance policy usually covers unknown and unforeseen risks only and operates on the assumption that (i) a buyer has carried out appropriate external due diligence; (ii) the deal has been robustly negotiated on an arms' length basis; and (iii) an appropriate disclosure exercise has been completed. In fact, negotiation of the terms of a W&I insurance policy is usually intrinsically linked to the due diligence findings and the specific terms of the underlying transaction documents.

Key W&I insurance policy conditions include:

  • Level of Cover: Every W&I insurance policy is subject to a specific cap or limit, being the maximum amount payable by the insurance provider to the insured party under the policy for any loss suffered from a breach of warranty and/or indemnity.
  • Premium: W&I Insurance is paid by the insured party via a premium which is typically calculated as a percentage of the total limit of insurance cover provided.
  • Excess or Policy Retention: A W&I insurance policy will usually be subject to a 'retention' or 'excess' whereby a fixed portion of insured loss suffered must be borne by the insured party in the first instance, with the insurance provider's obligation to pay only kicking in once this fixed portion has been exceeded. Sellers or management can often be asked to bridge some or all of that gap. Leaving aside the financial issue or the excess, a purchaser can often want management or the seller to take some risk so that they have 'skin in the game' in terms of making disclosures against warranties.
  • Coverage Exclusions: Some market standard exclusions applied by insurance providers include coverage for criminal fines and penalties, pollution/contamination, fraud, dishonesty and deliberate non-disclosure of the policyholder. Insurance providers also often refuse to provide cover for warranties which are considered to be easily capable of breach, forward-looking in nature or those which relate to contingent liabilities.

W&I insurance should always be addressed in the early stages of a deal so as to contribute to a smoother transaction process and help to avoid any gaps in coverage. This will also assist in understanding the limitations of a W&I policy so that any uninsurable risks can be priced into the consideration/ bid price where appropriate. It is a very competitive market and, therefore, it is typical to obtain quotes from multiple insurance providers.

W&I Insurance Going Forward

The use of W&I insurance in Irish M&A transactions has grown in popularity in recent years and is slowly becoming an integral part of the Irish M&A toolkit.

According to Aon's Global M&A Risk in Review Report (released by Aon plc in late 2018), from 2016 to 2017 there was a 34% growth in the number of deals insured globally, a trend which is also having an impact on the Irish M&A landscape.

The use of W&I insurance products allows buyers and sellers alike to change the way they view risk, and ultimately approach deals, and its increase in popularity is only expected to continue throughout 2019, particularly with global trends indicating a further decline in premium rates, an increase in insurance capacity and a greater desire amongst insurance providers to broaden coverage terms.

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.

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

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

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

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