European Union: Protecting Buyers And Sellers In European M&A Deals: Warranty & Indemnity Insurance Policies


Warranty and indemnity insurance policies ("W&I Policies") are becoming increasingly prevalent in the European market as an instrument to reduce the inherent risks associated with M&A transactions and to resolve impasses between sellers and buyers when negotiating sets of warranties in sale and purchase agreements ("SPA").

W&I Policies can be structured to protect either sellers or buyers in respect of liabilities deriving from breaches of warranties given in the context of the sale of a company or business. The use of W&I Policies has significantly increased in the UK market in recent years and appears to be increasingly applied, albeit at a lower level, in other European jurisdictions such as France, Italy and Germany. In this newsletter we provide a brief overview of the typical uses and functioning of W&I Policies in the European M&A market with a particular focus on market practice in the UK.

Typical Uses

Either a seller or a buyer may purchase a W&I Policy in order to obtain cover for the potential liabilities arising from a breach of the seller's warranties given in an SPA.

Seller-side policies

A seller-side W&I Policy protects the seller under an SPA for innocent misrepresentations or failure to adequately disclose against the warranties. Under a seller-side W&I Policy, the buyer makes its claim against the seller based on the SPA and the insurer then pays on behalf of the seller. In this type of policy, there is no contractual relationship between the insurer and the buyer. W&I Policies can offer varying amounts of cover to sellers, ranging from only a portion of liability to 100% of liability for indemnification up to the relevant agreed liability caps for the warranties.

In a situation where a buyer requests a retention of part of the purchase price or an escrow arrangement in order to have some form of security for liability coverage, a seller may instead use a seller-side W&I Policy to assure the buyer that liabilities will be met. As a result, the seller may be able to gain access to the full amount of the sale proceeds immediately as of completion.

Passive shareholders, including ultimate controlling shareholders, warrantors, or mere financial shareholders who are not involved in the day-to-day management of the target sometimes use seller-side W&I Policies to cover their liabilities. For example, in the case of a private equity firm faced with a secondary buy-out, a clean exit without limiting the set of warranties offered to a prospective buyer would be possible with a W&I Policy. A private equity firm that holds a W&I Policy can then proceed with liquidation and wind-up procedures even in the event the indemnification obligations under the SPA are still actionable by the relevant buyer.

Family-based sellers also use these types of policies since they may be hesitant to put their separate financial resources at risk in the event of possible indemnification obligations under an SPA following the sale of their company or business.

Although cost may be a concern, seller-side policies are sometimes used by receivers and administrators in restructuring or in insolvency situations since receivers and administrators are typically not in a position to give a potential purchaser significant warranties regarding the assets being sold.

Buyer-side policies

A buyer-side W&I Policy indemnifies a buyer for losses caused by breaches of warranties by the seller under an SPA. Under a buyer-side W&I Policy, the buyer makes its claim for indemnification directly against the insurance company without need for recourse to the seller.

Buyer-side policies allow the buyer to rely on warranties given by a seller whose ability to meet indemnification obligations in financial terms might otherwise be uncertain. Additionally, in situations where a dispute arises in negotiations as to the amount of the cap for liability that a seller is prepared to accept in a sale, the buyer may use a W&I Policy to obtain additional cover in order to meet its requirements despite the position of the seller.

Buyer-side W&I Policies are also sometimes used in competitive auction processes. In order to gain a competitive advantage, a bidder may offer the seller an opportunity to lower or eliminate its liability under the warranties to be given in the SPA.

Another situation in which buyer-side W&I Policies are used is in obtaining cover under the warranties in the SPA for a longer duration than the seller is willing to accept.

Procedure for Setting up a W&I Policy

Typically, a W&I Policy takes the form of a stand-alone document containing the terms of cover, exclusions and limits, which is negotiated simultaneously with the SPA.

W&I Policies are typically tailored in such a way as to mirror, as closely as possible, the warranties given in the SPA also in terms of qualifications, limitations and caps. It is therefore common practice that no significant difference appears between what may be claimed by the buyer under the SPA and what may otherwise be claimed under the policy. In general, the duration of the W&I Policy corresponds to the period of validity of the warranties under the SPA. However, as stated above, buyers may look for a longer duration as a matter of further protection.

A policy excess is often agreed upon in the sense that a certain amount (typically around 1% of the deal consideration) would in any event be payable by the insured party.

Common exclusions to the indemnification obligations under a W&I Policy include the outcome of any due diligence/disclosure letters, forward-looking warranties, breaches of warranties that are already known at the time of execution of the SPA, fines, fraud or fraudulent misrepresentations and penalties uninsurable at law.

Typical coverage

In Europe, standard coverage under W&I Policies typically includes unknown or undisclosed risks, such as breaches of warranties arising due to events which were not already known by the parties at the time of execution of the SPA. W&I Policies are used less frequently for coverage of already known or disclosed risks resulting from, for example, due diligence processes or negotiations of the SPA.

Alternative contractual mechanisms such as adjustment price formulae or specific Euro-for- Euro based indemnification provisions are more frequently used in these cases. However, W&I Policies may be taken out (usually with higher premiums) in order to cover sellers and buyers from known or disclosed environmental, litigation or tax-specific liabilities.

Premium rates, limits and costs

The cost of W&I Policies takes into account such factors as the complexity of the transaction, the claims expiry period, the existing insurance standing of the applicant, the industry sector, the jurisdiction of the deal, the quality of the transactional process and the advisers involved.

The amount of cover sought in a W&I Policy depends almost entirely on the attitude of the applicant towards risk. Sellers may be interested in covering the total limit of their liability for the warranties under the SPA, while buyers may be more comfortable with limited cover. For European transactions, in the current market, it is quite common to arrange policy limits equivalent to 25-50% of the enterprise value. Typically, premium rates range between 1% and 3% of the cover purchased and are normally payable in full at the inception of the policy.

Arranging a W&I Policy

To begin the process of acquiring a W&I Policy, a broker would typically offer an initial assessment of the potential terms of the W&I Policy and, if it is decided to proceed, the broker would then refer the matter to a lead insurer. The insurer would then carry out a detailed review based on such criteria as the overall context of the transaction, the nature of the business sector involved, the set of warranties involved and the disclosure process. Copies of all relevant documentation such as the SPA and due diligence reports would normally be forwarded to the potential insurer for review.

Once this detailed review is complete, a specific cost quotation would normally be sent to the applicant. The terms would be tailored to the transaction through negotiation between the parties. A final policy would then be issued which would normally be executed upon completion of the transaction under the SPA.

UK market perspective

A number of contributory factors have led to the growth and prominence of W&I Policies in the UK market. These include, among other things, the general increase in risk aversion which has been enhanced by the current economic conditions, the growth of insurance underwriting in London which has been the principal home for W&I Policies, and the increase in insurer competition which has led to the growing reduction in premium rates. As such, the UK W&I insurance market is now more competitive than it has ever been.

UK premium rates and costs

Premium rates for UK transactions can generally be obtained in the region of 1% of the W&I Policy limit purchased. The premium is generally payable in full, for the entire period of the policy, when the policy is taken out or shortly thereafter. The insured will also often have to pay the insurer's due diligence fees (typically between £2,500 and £15,000 plus VAT), though in the UK these are usually set off against the premium. In addition, in the UK the insured may have to pay an insurance premium tax which is payable on the total of the premium paid to the insurer and operates at 5%.

The minimum limit of insurance available is generally dictated by the minimum levels of premium payable to the insurer, typically £15,000 to £25,000. As a result, if the limit of cover is less than £1 million, the premium level tends to be uneconomical.

UK policy limits

With buyer-side policies, the buyer can choose the level of cover which provides the appropriate level of comfort required. Generally, a buyer will seek warranty protection through insurance at a rate of between 1% and 30% of the enterprise value. A buyer can of course seek to have the full amount covered, though this will depend on there being sufficient capacity in the insurance market. There are currently 6-7 underwriters in the UK which together offer capacity in excess of £100 million for primary coverage. This could be extended by using the full global insurance market which could offer a limit in excess of £200 million, although this would involve creating a syndicated facility. Generally in the London market, buyers seek an average limit of insurance of between £5 million and £10 million for deals up to £50 million, and £20 million or more for transactions above this level.

By contrast, a seller-side policy can insure up to the full limit of liability agreed in the SPA, plus defence and investigation costs.

Insurers typically require that the insured accept a certain portion of the risk through the policy excess. This policy excess is generally at least 1% of the deal consideration and will not normally become operative until the erosion of the minimum claims limitations negotiated under the SPA.

In addition, the policy will usually reflect the duration of the warranties given in the SPA, which may be of the order of up to a seven years post-completion for tax warranties and typically up to two years post-completion for general warranties.

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

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”

Mondaq Advice Centre (MACs)
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
Check to state you have read and
agree to our Terms and Conditions

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.

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 by clicking here .

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.


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.