M&A insurances offer buyers and sellers the opportunity to transfer known and unknown risks to the insurance market. The most commonly used insurance in the transactional context is the Warranty & Indemnity insurance (W&I insurance), covering unknown risks. The W&I insurance affords the buyer of a company with financial protection against breaches of the seller’s warranties under the SPA or APA. A W&I insurance can efficiently remove the seller’s financial exposure from warranty breaches through transferring the exposure to the insurance market.
As the use of W&I insurances has become normalized in the M&A-market, strategic benefits and value-adding elements have been realized. Below is a summary of the main advantages of insuring a transaction.
The W&I process follows the transaction timeline, and may often be finalised within 3 to 4 weeks. There are possibilities for a shortened timeline from the insurance perspective, however it is advantageous to allow for additional time to secure relevant capacity and resources from the insurance market well ahead of signing, particularly when the M&A market is highly active. Our insurance submission process is based upon materials such as the latest draft SPA, latest available annual accounts, an information memorandum or management presentation (if available), as well as our specific short-form questionnaire regarding the transaction. After selecting the preferred insurer, a draft policy is negotiated and the in-depth underwriting begins, with the final coverage position mainly being based upon sell-side disclosures, the buyer’s due diligence reports and Q&A with the deal team and its advisors.
The W&I insurance can be used for many reasons by a buyer to make its bid more attractive to the seller. The insurance further allows a buyer to extend the warranty period in the SPA/APA and increase the “liability cap”, and accordingly the protection in the event of a warranty breach as insurance capacity normally is available up to the full enterprise value, if so desired.
Do you have any questions regarding M&A insurance or want to know more about our services? Söderberg & Partners has advisers with extensive experience in the field. Contact us and we will get back to you!