The market for corporate transactions has once again grown considerably over the last year. As a result, the demand for insurance solutions for M&A risks in the form or warranty and indemnity insurances (W&I) has risen dramatically in recent years.
What is insured?
W&I involves securing actual losses as a consequence of warranty or indemnity promises. Both purchasers and vendors in a corporate transaction can conclude a W&I, which should come into force if a warranty promise made by the vendor proves to be incorrect. This is because if the guarantee given by the vendor (e.g. in terms of the correctness of tax processes or the unencumbered nature of shares) is incorrect, the vendor is fundamentally liable to the purchaser due to the contractual guarantee. It is mainly possible to insure unknown risks covered by warranties. Risks that are known to the vendor and purchaser, and that are usually the subject of derogations, can only be insured in exceptional cases.
Special subtypes of W&I include:
- Tax Indemnity Insurance Protection against unexpected tax effects
- Litigation Buyout Insurance Protection against subsequent or threatened legal disputes
- Environmental Insurance Protection against environmental risks
- Special Situation Insurance Protection against known risks identified in advance
Who is insured?
In the event of liability due to defective warranty, if the vendor is the policyholder, he shall be entitled to make a claim against the insurer for indemnification against liability claims by the purchaser.
In the event of liability due to defective warranty, if the purchaser is the policyholder, he shall be entitled to make a claim against the insurer in compensation for the damages incurred.
In the final analysis, the purpose of Warranty & Indemnity Insurance is to protect the interests of vendors and purchasers, irrespective of which of them has concluded the insurance contract.
Who provides the insurance?
A handful of insurers offer their capacity in Germany. The insurers now have the decision-making underwriters in Germany, so that time-consuming communications via London are a thing of the past. In the past, the transfer of risk often failed because an insurance solution was only addressed by the parties at a very late stage as part of M&A preparations and the insurers themselves demanded extensive underwriting. Accordingly, the insurers are now guided by the available information from due diligence. The costs of W&I are generally between 0.9 and 2 % of the sum insured, although there are signs of a drop in insurance premiums in recent times.