When buying or selling a company, a warranty and indemnity (W&I) insurance policy can be used to insure the vendor warranties and tax indemnity within a share and purchase agreement (SPA). This can allow a cleaner exit for the vendor and additional financial recourse for the purchaser.
Nearly 10 years ago, we at Gallagher facilitated an Airmic workshop to discuss the merits of W&I.
Honestly, at that stage in the product's development, it was an interesting discussion, but very hard for risk managers to get enthused for the following reasons:
- Few insurers provided the cover;
- It was expensive and clunky to arrange;
- Not many transactions were using it.
In summary, it was nice to know about, but little more.
Fast forward to today, and we see a very different story.
There are now 20 plus insurers, providing consistently wider cover at lower prices, and the process is slick, largely due to the increasing number of lawyers occupying the underwriter's chair.
The game changer has been that sellers will often now drive the process. They will limit their liability in the SPA for a breach of their warranties to say £1 and ask that the buyer procure a buy side W&I policy to claim directly against, in the event of such a breach of warranty.
This enables a clean exit for the seller, and often the only source of financial recourse for the buyer, hence the reason that risk managers now really do need to understand the product.
Although this insurance is usually dealt with at board level, the risk manager needs to be aware of the product, and its ability to help de-risk a transaction by insuring the vendor's warranties.
The process takes place during the heat of the deal and having the risk manager there to assist in this work stream can be beneficial. They need to be able to advise the board of the products available and specifically highlight the mechanics and timings involved, and then assist in the underwriting process where required. Deliverability of the policy at signing is key and nobody wants the insurance to hold up a transaction! This involvement can also run alongside any vendor or buy side insurance due diligence being undertaken.
Whether buying or selling a business, this product needs to be considered and understood.
George Minoprio is executive director, Mergers and Acquisitions Practice at Gallagher. This article is based on a recent Airmic Academy workshop presented by Mr Minoprio, together with AIG's M&A Group Counsel, Rory O'Broin.