Cover Warranties in Mergers & Acquisitions

Warranty & Indemnity (W&I) Insurance – Overview

When a Life Science or Biomedical business is sold, the selling party is often required to give various warranties to the buyer. These warranties are deemed statement of facts, which offers protection to the buying party such as:

• Ensuring the information of the business is clear and consistent
• Providing contractual reassurance of the ability to claim against the selling party, if they suffer financial loss

The key risk when providing a warranty or indemnity is that a successful claim could leave the selling party having to pay back a proportion of its sale price, or worse, the full amount. W&I insurance can act as a risk transfer to insurers.

Policies tend to be put in place at the same time as completion of a deal, but in reality can be done at any time. The life span of a policy usually runs in line with the limitation period in the share purchase agreement (SPA). Generally though, it’s 2-3 years for non-tax warranties and 7 years for tax claims.

W&I benefits

W&I claims are quite rare, particularly when professional advice has been sought. That said, given the current economic climate caused by COVID-19, this type of insurance may provide buyers with much-needed reassurance that their investment risk is reduced.

W&I insurance can provide comfort to the buyer of being able to claim directly against a well-capitalised insurer. It can also assist in reducing tensions on the selling side if there are a number of shareholders with differing willingness or ability to assume future liabilities (e.g. where there are external financial investors alongside executive management).

How insurers underwrite W&I

The majority of W&I underwriters are ex-corporate lawyers or investment bankers who have hands-on experience of running M&A processes.

As part of their underwriting process, insurers will require access to the virtual data room and, on a non-reliance basis, the due diligence reports that have been prepared for the transaction in addition to a copy of the SPA.

How much cover is purchased?

Policy limits tend to be between 10–30% of the deal value. The premium is expressed as a percentage of the policy limit, which insurers use as a rating guide.

By way of illustration on a £200m transaction, a 10% policy limit represents £20m of cover. At a rate of 1%, this would represent a single premium payment of £200,000.

The premium is a single one-off payment for the entire policy period and is due shortly after closing. Insurers also apply an excess to the policy, which tends to be between 0.5-1% of the deal value.

There has been a general increase in W&I policies sought for M&A activity in recent years, and the economic impact of COVID-19 is sure to place greater emphasis on the finer details. W&I insurance is a potential solution to mitigating risk for both parties, whilst providing much-needed reassurance against the investment and/or sales proceeds.

At Hayes Parsons Insurance Brokers, we have a panel of leading W&I insurers, and would welcome a conversation should this be of interest.

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