M&A-Transactional Risk Insurance
To match the needs of the M&A market with regard to risk allocation, the insurance industry provides innovative solutions: most importantly the warranties & indemnities insurance, as well as other transaction risk insurances like tax opinion insurance, contingent risk transfer, insurance for public ofering of securities (POSI), or environment impact liability insurance (EIL).
The warranties & indemnities insurance (W&I insurance, also known as representations and warranty insurance in the U.S.) is a tool to transfer risks related to contractual warranties and indemnities to the insurance market.
W&I-insurance may be used as an alternative, a substitute, or as an addition to customary collateral, e.g. an escrow account. From a financial perspective, W&I Insurance is particularly effective, if the insurance premium is significantly lower than the purchase price discount requested by the buyer for the reduction of waiver or certain warranties and/or indemnities.
W&I-insurance can be bought as a seller-side or a buyer-side insurance policy.
Seller-side W&I Insurance
A vendor (or warrantor) may want to buy W&I Insurance for the following reasons:
- Cost-effective substitute of or addition to customary collateral.
- Full and immediate availability of sales proceeds.
- Financial investors and private equity companies are able to liquidate and close their funds right after completion of the transaction (clean exit).
- In an auction the seller can improve its offer by opting for an insurance solution (dress up your bride).
- A solvent insurance company can often grant a better security to interested bidders than the seller.
- Prevention of delays or break-down of negotiations between seller and buyer.
Buyer-side W&I Insurance
The buyer-side W&I Insurance is an insurance for first party loss, in which the purchaser (the first party) is paid by his insurer (the second party) for all loss arising from a breach of warranty, or in certain cases under an indemnity. The insurance benefit is thus intended to wholly or partly compensate the insured for its own financial loss, which occurs as a result of the insured event, i.e. a breach of warranty, or claim under an indemnity. Unlike the seller-side policy, generally, no final adjudication is needed under a buyer-side policy before loss suffered by the insured is compensated.
It is enough that the purchaser proves loss arising from a breach of warranty, or under an indemnity. Depending on the scope of coverage of the insurance contract, the insured must claim first against the vendor (or warrantor), or he may instead directly demand compensation for the loss incurred from the insurer. This second, more client-friendly approach seems to prevail today. However, most insurance policies do stipulate subrogation and recourse rights of the insurer, in particular against the seller.
A purchaser may want to buy W&I Insurance for the following reasons:
- Ability to directly claim for compensation of loss against the insurer, if such loss is arising from a breach of warranty or under an indemnity.
- Protection of the buyer’s investments in the target company. Prevention of delays or break-down of negotiations between seller and buyer.
- The latter applies in particular to situations in which claims against the vendor cannot be brought or if they are, only under certain conditions:The vendor is a fund or a company which is wound-down and liquidated after the transaction.There are doubts regarding the long-term solvency of the seller as a debtor or about the on-going existence of the seller as a legal entity.
- The seller is subject to insolvency proceedings or there are reasons that such insolvency proceedings are likely to start.
- The seller is a private individual, or consists of a majority of natural persons, which may belong to the same family (e.g. in the context of a sale of a family-owned company).
- The seller is owned by a multitude of shareholders with small individual participations that are not jointly and severally liable.
- The seller is a mere holding or shell company with its headquarters in a tax haven or jurisdiction where it may be difficult for the purchaser to have his potential rights asserted.
- In an auction the addition of W&I Insurance improves the offering of the bidder (sugar your bid).
WALKER RISK SOLUTION has developed a methodology, which matches the client specific risk profile with insurance solutions available in Switzerland or in the London insurance market. This approach enables bespoke solutions that protect the client from financial loss arising from a variety of financial, operational, legal or regulatory risks.
WALKER RISK SOLUTION LTD
Bespoke Insurance Solutions for the Financial Sector
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