W&I insurance keeps growing fast, facilitating transactions in the Spanish M&A space. Here are a few reflections based on recent experience advising the most active insurers in the market.
No, American-style policies have not made their way to Spain yet, but it is true that some of the new players are making a substantial effort to increase cover, following the damages definition in the SPA, and keeping warranty qualifications and exclusions at the bare minimum or non-existent, without increasing the premium. These new players offer back-to-back cover focusing only on the retention / attachment point, coupled with the standard set of general exclusions.
Open tax audits
Insurers are not ready to cover identified contingencies under W&I policies but the question arises, what happens with ongoing tax investigations of a general scope? This has been open to debate for some time and, while there is resistance to covering the outcome of existing tax audits, market practice today is to include customary or generic audits in the cover of W&I policies.
It is often the case that purchasers invite sellers to reinvest the sale proceeds in the acquisition vehicle or further up the chain of control. Purchasers like this kind of arrangement, as keeping sellers engaged in the target business after completion is considered a guarantee that the sellers would honour their indemnity undertakings under the SPA.
But, for the insurers, rollups pose fundamental issues. Claims under the policy will end up compensating the seller, which could use the insurance policy to "make good" bad warranties and we must not forget that, leaving technical discussions aside on the definition of "seller's knowledge", there is a strong belief that sellers know what they are selling.
The absence of a proper bring-down disclosure mechanism is gradually becoming a fundamental issue for insurers. Most issues are flushed out during the bring-down disclosure, minimising future claims under the W&I policy.
Traditionally, Spanish M&A practice has not been strong on the use of disclosure letters or bring-down statements. Many SPAs do not foresee any such processes. Purchasers seem to be comfortable with the standard repetition of the seller's warranties at closing and sellers do not want to start a debate about purchasers potentially walking away from the transaction if there is a breach of warranties between signing and closing. This is even more so in auction processes where it would be difficult to revive a transaction with an alternative purchaser.
Many NBIs require robust bring-down disclosure mechanisms and most W&I policies feature "no known claims" wording that mitigates the absence of disclosure. Still, this is an area where W&I providers may need to educate their clients.
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