Warranty & Indemnity Update
March 2025What is Warranty & Indemnity Insurance, when is it used and what are the current and future trends in this line of business?
As part of Special Risks Week, we thought we would write a piece on Warranty & Indemnity Insurance, a line of business which is growing in use and prominence around the world, particularly as M&A activity begins to increase after a relatively quiet period over the last couple of years.
In the article, Nathan Penny-Larter, a partner in our Financial & Specialty Risks Team, considers what W&I insurance is, what it insures against and when it is used most commonly. He then considers the key developments over the last few years, the developing body of case law in this area and what developments we can expect in 2025 and beyond.
What is W&I Insurance?
The use of Warranty & Indemnity insurance (W&I) has become a lot more commonplace in corporate merger and acquisition transactions (M&A). More and more sellers are looking to secure W&I insurance to provide cover for commercial and tax warranties they are required to provide to the buyer in a transaction.
A warranty is a statement of fact about a business and its financial position as at the date of the completion of the transaction. It provided a purchaser with the contractual right to bring a claim for breach of warranty should the buyer suffer a loss as a result of those warranties turning out to be untrue.
The buyer therefore looks to secure as many warranties as possible to safeguard its position in the transactions, whereas the seller will wish to limit the number of warranties it gives and also build in limitations of liability.
In these transactions there is potentially a clear imbalance as to the allocation of risk and this leads to heated negotiations, fallings out and sometimes the abortion of the transaction itself.
W&I insurance is designed to provide cover against loss which might arise from a breach of warranty or tax indemnity in the M & A transaction, and can be a useful tool to align the buyer’s and the seller’s expectations around post-completion liability.
When is W&I Insurance most commonly used?
W&I policies may be buy-side or sell-side, although they were first brought to market as sell-side products to provide sellers with some comfort when exiting companies. The last few years have seen an increasing trend towards purchasers also taking out policies. Responsibility for payment of the premium will usually be a source of debate between the parties to the transaction.
A purchaser might wish to consider a policy where, for example:
- the seller makes it a condition of the deal;
- there is a tender process, and the buyer might wish to offer a policy as being a point of difference to its bid;
- where the transaction documents provide little or limited recourse against the seller; or
- where representatives of the seller are due to stay with the business after completion, so there is an incentive for the buyer to preserve the relationship.
A buyer might look to incept a policy where, for example:
- they are individuals who wish to use the proceeds of sale immediately upon, or shortly after, the sale is completed. The existence of the policy provides them with more comfort to proceed on that basis;
- where a buyer has refused to incept a policy; or
- where the seller is to be wound up post-acquisition (so as to minimise the risk of personal liabilities to the directors and officers of the seller).
The use of W&I policies has expanded into new jurisdictions. Traditionally they were used in the US, the UK and Australia but now they are a truly global policy and used increasingly in Africa and Asia.
It is the greater security offered to purchasers which has stimulated this increased interest in taking out such policies.
Key developments
In the period mid-2022 to mid-2023 there was a steady decline in global M & A activity following a boom after the global Covid pandemic. There was a reduction in global deal values and also the volume of deals which were being completed globally.
Having said that, however, global M & A activity grew steadily in the second half of 2023 and throughout 2024, particularly in the small to mid-level market. This was despite fears of a global recession, rising interest rates and inflation and a very unpredictable geopolitical environment, particularly in the Middle East and Eastern Europe with the conflicts between Israel and Palestine and Ukraine and Russia affecting investor confidence. At the same time the W&I market has continued to expand, and we have seen lots of activity in Asia and Latin America. With this, we have seen an exponential rise in the number of claims for indemnity under W&I policies in 2023 and 2024.
Over the last couple of years, we have also seen the first W&I claims working their way through the UK Courts. For example, the High Court handed down its judgment in Finsbury Foods v Axis. This was a claim arising from the acquisition of a bakery business where the buyer alleged that a price and recipe change was not disclosed before completion. This was a good result in the courts for Insurers, because they successfully defended the claim on every basis. In 2023 there was also the case of Project Angel Bidco Ltd v Axis which dealt with corruption-related losses linked to the buyout of a construction firm. The firm subsequently collapsed due to allegations of bribery in the hierarchy. Again, the Court dismissed the claim and Insurers were successful.
Developments in 2025
Whilst it is yet to be seen what effect the recent re-election of Donald Trump in the US might have on global M & A activity, generally speaking, M & A activity is expected to show steady improvement as market conditions continue to stabilise. There is potential for an increased focus on AI and mergers in the pharmaceutical sphere. Of course, transactions of that nature may be susceptible to claims, particularly around the scope of due diligence carried out by the buyers.
Synthetic W&I (which are warranties in their entirety, or in part, being negotiated directly between the buyer and the W&I Insurer without being reflected in the transaction documents) are becoming more commonplace and this is something into which W&I Insurers need to look in more detail.
Finally, ESG continues to be more and more at front and centre of considerations. There is likely to be an increase in M & A activity in European jurisdictions and this may well bring about claims around the availability of tariffs, consents and planning considerations.
Insurers are also looking to cover a wider range of transactional risks. This includes specific covers for intellectual property risks and tax risks which might otherwise have represented a deal breaker in the negotiations between the seller and the buyer. These are issues which Insurers need to look into and appropriate risk assessments should be carried out. There has also been a growth in the coverage of new breaches, which are those incurring between the signing of any documentation and the closing of the deal. Traditionally these were not covered by W&I policies, but Insurers are now looking to be more willing to cover such eventualities and risks.
Conclusions
As activity around the world continues to increase, inevitably there will be more pressure placed on W&I Insurers and more claims made against policies. It is important that Insurers get to grips with the due diligence processes carried out by Insureds before entering into the policies. If transactions involve high risk areas, such as pharmaceutical or AI, then the queries raised by Underwriters before writing the policy come into greater focus.
For more information on any of the issues covered in this article, please contact Nathan Penny-Larter.
For more information about other topics which we will cover in this year’s Special Risks Week, please click here.
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