What is W&I insurance?

W&I insurance is the generic name for insurance which provides for losses arising from a breach of warranty and/or, in certain cases, under an indemnity. The policy can be structured to indemnify either the warrantors (under a seller’s insurance policy), or the buyer (under the buyer’s insurance policy). This will depend on who is seeking the benefit of the policy. The trend more recently is for a buyer to obtain the W&I insurance.

Enhancements

As competition between W&I insurers becomes more intensive, W&I policy enhancements and more bespoke insurance solutions are becoming increasingly available to provide insurance cover for matters which were previously uninsurable or were uneconomical to insure. For energy sector clients in Ireland, the W&I insurance offering is increasingly attractive with enhancements and new solutions being particularly suitable to underwriting risk associated with sale and purchase transactions involving energy and renewable assets.

The following are some of the recent innovations and enhancements which are now available in the W&I insurance market:

Synthetic warranties

‘Synthetic warranties’, so-called because they are provided by an insurer under the W&I policy and not the seller under the share purchase agreement, are negotiated and agreed directly between the purchaser and the W&I insurer.

The requirement for synthetic warranties generally arises where a seller is not prepared to give commercial warranties. However, the availability of synthetic warranties on a particular transaction will depend on many factors including the type of assets/target business, the size of the transaction, and the quality and extent of due diligence information available. Although a disclosure letter is not used to disclose against synthetic warranties, insurers will still want to see that a robust diligence exercise is undertaken by the buyer and that a well populated data room has been made available.

Insuring tax matters and the Synthetic Tax Deed

The level of innovation to insure tax risks arising in M&A transactions has been particularly evident in recent years. Certain tax issues that were traditionally regarded as too difficult to underwrite, such as transfer pricing risks or availability of tax assets, eg capital allowances or tax losses to be carried forward, can now be insured in certain circumstances.

Insurers are now offering ‘contingent policies’ to address known areas of uncertainty in tax matters that have been identified as part of a buyer’s tax due diligence and a specialty insurance market has developed to write specific policies to address particular tax risks in the context of M&A transactions.

Similarly to situations in which synthetic warranties are required, a seller may also not be prepared to provide a tax deed to the buyer as part of a sale process, in which case certain insurers may be prepared to provide a standard ‘synthetic tax deed’ against which the buyer would be entitled to claim.

Extension of warranty survival periods

Whether a buyer is seeking to make its bid more attractive in an auction process, or a seller has simply successfully negotiated shorter limitation periods, W&I insurers can offer extensions to the warranty survival periods under the terms of a W&I policy, regardless of the warranty survival periods that are agreed in the SPA.

Knowledge or materiality scrapes

Where warranties are qualified by the awareness of the seller or its management team, certain insurers can offer a ‘knowledge scrape’ of the warranties under the terms of the W&I policy, effectively disapplying the general knowledge qualifier in favour of the seller for the purposes of the warranties. Similarly, where there is qualification as to materiality in the warranties, insurers can offer a ‘materiality scrape’ whereby the materiality of a matter is disregarded for the purposes of enabling the buyer to make a warranty claim against the insurer.

Nil excess

Usually, a W&I policy will have an ‘excess’ or ‘deductible’ which is a certain minimum value of insured losses which must be reached before the W&I policy is engaged. For many transactions in the energy and renewables sector, insurers are now willing to offer nil excess policies, entitling the insured party to claim on and from the ‘first euro’ of any loss suffered by it.

US-style indemnity basis for recovery

Some W&I policies may now feature an indemnity basis of recovery, rather than the standard contractual basis usually provided under an Irish or English law share purchase agreement. This means that buyers will be able to claim for losses on a euro-for-euro basis (including costs associated with the claim) without having to prove the actual reduction in the value of a company caused by a specific warranty breach.

Conclusion

With the availability of enhancements and different types of insurance products, buyers are now deploying W&I policies tactically to maximise their chances of success in M&A auction processes or to bridge any gaps in the cover that has been negotiated with a seller. As many of the secondary sales in the energy and renewables sector in Ireland are run by way of a competitive auction process, buyers can now significantly differentiate their bids on terms other than value by using W&I products, with options for additional enhancements, to limit a seller’s residual liability in the M&A transaction documents.

It should be borne in mind that enhancements will generally have a cost implication for the policy premium payable and can increase the extent of due diligence required as some insurers may take a more conservative approach where policy enhancements are requested.

Therefore, it is important to take the right advice on the most appropriate insurers to approach and on what policy enhancements or more bespoke insurance solutions might be available where a party is proposing to use a W&I policy.