General Insurance Article - Dispelling myths around Warranty and Indemnity insurance


The Warranty and Indemnity (W&I) insurance market has witnessed remarkable growth in recent years, reflecting an increased recognition of its value in facilitating mergers and acquisitions (M&A) transactions. Before addressing the prevalent myths about W&I insurance, it's essential to understand what W&I insurance is, who it benefits, and its application in the M&A landscape.

 By Freddie Spearman, Senior Associate - Mergers and Acquisitions Broking at WTW

 W&I insurance explained
 W&I insurance is designed to protect buyers and sellers in M&A transactions from financial losses arising from breaches of warranties and indemnities in the sale agreement. This type of insurance covers the risks associated with unexpected liabilities, providing a safety net that can make transactions smoother and more secure for both parties.

 Who benefits from W&I insurance?
 This insurance is invaluable for corporate entities, private equity investors, and other stakeholders engaged in M&A activities. By transferring specific risks from the buyer or seller to an insurer, W&I insurance can facilitate negotiations, enhance deal certainty, and provide a clearer path to transaction completion.

 Why and when to use W&I insurance
 W&I insurance is particularly useful in transactions where there is a significant gap between the risk appetite of the buyer and the seller. It offers peace of mind by covering undisclosed or unknown liabilities, enabling smoother transitions, and protecting the interests of both parties. Typically, it's considered at the initial stages of transaction planning, where it can be integrated into the strategic approach to risk management in M&A deals.

 With this context in mind, the W&I insurance market's expansion is not only a testament to its practical value but also to its evolving sophistication, with products being tailored to meet the changing dynamics of the M&A world. The number of policies placed in 2023 was roughly four times that of 2016, highlighting the market's rapid development and the increasing comfort level of lawyers, professional advisors, corporates, and private capital with W&I insurance's nuances and benefits.

 WTW's transactional risks team has been instrumental in this growth, advising on an increased number of transactions in 2023, despite a general slowdown in global M&A activity. This achievement underscores the importance of expert guidance in navigating the complexities of transactional risk insurance.

 To further educate and inform our clients and the broader market, we are launching a series of articles detailing the lifecycle of the W&I insurance process. Our first instalment aims to clarify some common misconceptions about W&I insurance, setting the stage for more in-depth discussions in future articles.

 Addressing four common myths about W&I insurance

 All policies are the same, so cheaper is better
 Contrary to this belief, not all policies are created equal, and coverage is paramount. Our expert team, comprised of lawyers, accountants, tax, and insurance professionals, evaluates insurer terms with the client's objectives in mind. This approach allows us to secure the most effective insurance solutions, aligning policy coverage with the transaction's specific needs and minimizing any discrepancies between transaction documents and the insurance policy.
  
 There is no need to diligence that topic; the insurance will cover it
 This misconception could not be further from the truth. W&I insurance is designed to cover risks related to undiscovered or undisclosed matters, not to replace comprehensive due diligence. Insurers expect thorough due diligence and disclosure exercises as a precondition to coverage. Therefore, aspects not reviewed during due diligence may not be covered, barring a solid commercial reason for their omission from review.
  
 The underwriting process is seeking to catch us out
 On the contrary, insurers aim to provide as comprehensive a coverage as possible. A detailed engagement with the underwriting process allows insurers to understand the transaction better, leading to broader coverage offerings and fewer exclusions. Transparency and detailed information are key to achieving favourable underwriting outcomes.
  
 Insurers don’t want to pay claims
 In reality, insurers are inclined to pay valid claims promptly. Demonstrating reliability and a strong claims payment history is crucial for insurers to differentiate their W&I products and affirm their commitment to service excellence. WTW's experience in 2023, overseeing the payment of over $320 million in W&I claims, attests to the industry's dedication to fulfilling its obligations.

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