What is Warranty and Indemnity Insurance and how does it work?

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Warranty and Indemnity Insurance (WII) is a form of risk insurance taken out to protect against breaches of pre completion warranties in a large business sale or share sale transaction. Essentially the insurer becomes the bearer of risk with respect to any such warranty breaches by the vendor.

Typically this WII can be taken out as seller side insurance (IE, the seller is the insured party, so that the insurer will make payment in respect of particular breaches of pre completion warranties by the vendor) or buyer side insurance (where the buyer is in fact the insured party, insuring against a failure by the vendor to remedy or make good damage suffered as a result of breach of warranties by the vendor).

There is not a huge market for WII in Australia, so it pays to do your homework. An insurer will of course want to carry out its own due diligence on the transaction in question and may also want input on parts of the document. For example, conditions precedent to the deal proceeding or not.

Regardless of what warranties are given, a WII policy will list inclusion and exclusions, so whilst an insurer may not request deletions or amendments to the actual vendor warranties, it may be wise to bring the sale document into line (or as close as possible) with the WII policy. An example of a regular exclusion from WII policies is fraud on the part of the vendor. Some other exclusion examples more closely resembling carve outs from warranty liability in a sale document include disclosures made by the vendor prior to completion and information gathered or which ought to have been gathered by a purchaser during due diligence.

The advantages of WII can be seen from the perspectives of both buyer and vendor:

  • for the buyer, the value of the policy may be far greater than any escrow amount that can be negotiated to be held back from the purchase price to secure breaches of warranties by the vendor; and
  • for the vendor, the cost of the premium of WII will be a one off expense and most likely will be considerably lower than an escrow amount to secure future warranty breaches.

WII will not always result in a complete release of liability for the vendor. It is not uncommon that a purchaser will demand that if a claim is not met by an insurer, then the purchaser will have a right to make a claim against the vendor. For this reason it is critical to ensure that the vendor is satisfied that the WII policy adequately covers the risk presented by a breach of any warranty.

If you would like further information on the above, please contact Tim Osborn

 

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