PYV are pleased to announce the availability of Warranty and Indemnity Insurance Solutions for its loyal and expanding customer base.

Anyone who has been involved in the buying and selling of companies will know that the process is very rarely straightforward or free of problems. The giving and receiving of warranties in the Sale Agreement is one area where the parties, with their professional advisers, often seek to differ.

Depending on the mechanics of the deal, buyers regularly consider the level of warranty protection offered by the seller to be inadequate. This gap between expectation and delivery usually arises when the sellers offer a monetary cap on the warranty liability equivalent to, say, 10% of the purchase price, whereas the buyers will look for a minimum of 50%. Buyers can also have concerns about the ability of the sellers to meet their financial obligations under the warranties. Finally, the sellers may simply be worried that negligent failure to disclose against the warranties may result in loss of some or all of the consideration they receive.

Warranty and Indemnity Insurance (W&I) has been available in the UK for over 20 years and is now considered an important tool by those involved in Mergers and Acquisitions. It has been used to eliminate deadlocks in negotiations on many transactions over the years, such as the sales of Golden Wonder, Tetley Tea, William Hill, Umbro and Asprey. It has also been used as part of corporate restructuring, enabling companies such as Inchcape, Ferguson and Whitecroft to maximise exit prices and return excess cash to shareholders with minimal risk.

Policies have traditionally been taken out by sellers, providing cover against the risk of the buyer proving breach of warranty or making a call on the tax deed - this is called 'seller-side cover'. In recent years, cover has been increasingly bought by buyers, where policies provide first party protection against loss suffered by the buyer arising out of a proven breach of warranty and the inability to recover the full extent of the resultant damages due to contractual limitations in the Sale Agreement or impecunity of the seller - this is known as 'buyer-side cover'.

As a rule, policy periods under W&I policies match the time limitations set out in the Sale Agreement, typically 12-24 months for non-tax claims and 6-7 years for tax claims. As with other forms of insurance, insurers usually insist on policy excesses to focus the minds of the parties, the level of such excesses being determined primarily by the size of the transaction. Also, exclusionary language is used where insurers are unable to find comfort on certain aspects of the risk.

Premium rates are calculated on a per risk basis, focusing on a number of factors including, inter alia, policy limit, scope of warranties, adequacy of the disclosure and due diligence exercises and information relating to the target company. As a very rough guide, 'seller-side' rates tend to be in the 1.5-3% of policy limit range, with those for 'buyer-side' cover ranging from 3% to 6%.

Occasionally during a transaction, the disclosure exercise reveals a particular issue, which becomes a deal-breaker. Good examples are outstanding litigation, IP and tax on restructuring. The parties get bogged down in finding ways to commercially address the issue. Insurance has often been used to move the process forward, by removing the unknown and unforeseen element.

By way of example, the buyer is advised that the target company is currently the subject of some litigation and there is no certainty to what extent the company will ultimately be found liable. There are a number of options open to the buyer - reduce the consideration to reflect the possibility of future loss, insist on a £-for£ indemnity from the sellers to cover adverse developments or withdraw from the deal. Alternatively, the parties can arrange a 'litigation buy-out' policy to pass on the risk of adverse litigation development to an insurance policy. 'Tax opinion liability' insurance can also be used to cover off the potential for unforeseen tax liability post-completion.

W&I and affiliated products are very specialised forms of insurance and PYV is proud to be one of only a limited number of broking houses to have the requisite capability to transact the class. Over the last 7 years, members of our specialist team have been involved in over 1000 M&A transactions where W&I was considered, arranging in excess of 250 policies in the process, and have access to all the insurers currently offering W&I.

If you are representing a buyer, seller or target company and believe that W&I may provide the solution to a problem in the transaction, please contact:

Next steps?
Contact Angus Ogg
Tel: 020 7626 6789
Fax: 020 7648 5153
Email: angus.ogg@pyv.co.uk