W&I insurance in M&A transactions

A traditional product in a new context with advantages for all parties

A warranty and indemnity (W&I) insurance policy is an insurance policy that covers a seller’s liability in the case of a breach of warranties by the seller in a sale purchase agreement (‘SPA’). It’s a policy that has been around for a long time but it has become increasingly popular (both globally and in Belgium) over the last few years. It is seen as an alternative to the traditional indemnification set up in M&A transactions with multiple insurance brokers offering the product.

Although W&I insurance is mostly used in larger transactions (deal value> EUR 100 million), it can definitely also provide additional value in smaller deals.

Similarly to traditional insurance products, W&I insurance provides coverage for certain risks to the benefit of the insured party. It is part of a broader menu of M&A insurance products such as special tax liability insurance, title insurance, litigation buyout insurance, contingency liability insurance, etc.

W&I insurance has advantages for both parties. Sellers mainly consider W&I insurance as a means to limit their liability, i.e. to allow for a ‘clean exit’ meaning that they immediately receive the full purchase price amount (instead of granting a bank guarantee or escrow and living in uncertainty for a certain period of time). The latter may be of special interest to private equity players or sellers – private individuals who are on the verge of retirement for example.

The main benefit for buyers is that they will be better protected against losses resulting from a breach of warranties. In addition, the fact that claims are filed directly against the insurer means that buyers will be better protected against major risks such as the potential insolvency of the seller. Sometimes the mere fact that buyers have W&I insurance will also induce sellers to accept a lower purchase price.

Moreover, there may be a common interest for both parties when the seller and the buyer want to maintain a commercial relationship going forward (as is often the case where the seller remains on board in a management role) and the parties want to avoid friction in their relationship.

Types of W&I insurance

In terms of W&I insurance, a distinction is made between sell-side and buy-side policies. In the case of a sellers’ policy, the buyer is in principle not a party to the insurance contract and thus can only direct its claim to the seller based on the SPA. The seller can then turn to the insurer for coverage.

In the case of a buyers’ policy, the seller is not a party to the insurance contract and the buyer can turn directly to the insurer to be held harmless.

For risks which are not covered by the W&I insurance policy, the buyer can still bring a claim directly against the seller in line with the applicable indemnification principles agreed in the SPA.

Our research shows that the majority of W&I policies are taken out by buyers.

Exclusions and limitations

In practice, certain matters are excluded from insurance coverage by the insurer, these include but are not limited to :

  • known risks identified during the due diligence process;
  • fraud or misrepresentation;
  • environmental matters;
  • consequential losses;
  • other seller obligations such as non-compete obligations.

Additional coverage for some of the above matters can be sought from the insurer, other matters (such as fraud) will never be covered.

In addition to the exclusions, there are also limitations to the degree of coverage that applies. These limitations are, in practice, for the most part, in line with what has been agreed in the SPA (e.g. time limitations, a de minimis threshold, a basket, a deductible, a max cap and general exclusions).

The exact scope and content of the exclusions and limitations will be the result of the negotiations between the insurer and the insured party.

Timeline and process

In practice, a term sheet is requested from an insurance broker early on in the sales process so that there is sufficient time to consult the insurance market thoroughly with a view to achieving the desired coverage.

Selected insurers will then request access to the transaction documents. After reviewing the transaction documents, insurers will then submit a non-binding indication of interest stating the terms and conditions upon which they are willing to provide coverage.

The selected insurer will be granted access to all of the documentation in the data room as well as any due diligence reports. At this stage, the insurer will perform their own review of the due diligence report and will request additional information to reach their desired level of comfort. Finally, based on their findings, the insurer and insured party will negotiate the risks covered, the exclusions and the insurance premium.

The entire process of concluding the insurance policy generally takes about 2 to 4 weeks but this can be reduced to 1 week in urgent cases.


W&I insurance premiums usually vary between 0.9% and 1.7% of the policy limits (plus insurance premium tax) and depend on various factors.

Conclusion: be mindful and negotiate with caution

Caution should be exercised when negotiating the terms and conditions of W&I insurance, both by the insurer as well as the insured party.

In an ideal situation, the provisions of the insurance policy should be fully in line with the terms and conditions of the SPA to ensure maximum coverage. Different provisions in the SPA and the insurance policy can lead to unpleasant surprises such as recovery issues.

In practice, all parties involved should be advised by a legal counsel with M&A experience. At PwC Legal we have a broad range of experience in performing due diligence reviews on W&I insured transactions and related matters. If you have any questions or want more information on the topic, do not hesitate to reach out to us.

Ive Serneels - Advocaat Vennoot / Avocat Associé, PwC Legal BV/SRL

Stijn Vanbaelen - Managing Associate, PwC Legal BV/SRL