Our Approach to Transaction Solutions | Warranty & Indemnity Insurance | Tax Liability Insurance
Warranty & Indemnity Insurance
Warranty & Indemnity (W&I) Insurance is an insurance product designed to protect parties in an M&A transaction from financial loss arising from breaches of warranties and certain indemnities given by a seller to a buyer under a sale and purchase agreement (SPA).
A buyer may replace the indemnity expected from the seller with insurance, or purchase cover that extends the period during which the buyer can make a claim and to a higher limit, above that offered by the seller (if any).
Sellers may also use this product to replace certain SPA obligations, allowing them to return sale proceeds to investors rather than tie up money in escrow, or retain the trailing risk of having to meet a warranty claim.
Uses of W&I Insurance
W&I insurance enables parties to an M&A transaction to pro-actively manage transaction risks. This brings with it a number of benefits, including a clean exit for sellers, peace of mind for buyers and facilitation of the negotiation process (thereby enhancing deal certainty).
Warranties are contractual statements in a SPA given by a seller regarding the condition and circumstances of the sale target at a given time, and the buyer enters into the SPA on the basis that such statements are true and accurate.
In a typical transaction without W&I insurance, where these statements turn out to be untrue or inaccurate and, as a result, the buyer suffers financial loss, the seller may be liable to pay damages as compensation for breaches of warranties.
With a W&I insurance policy in place, the insurer insures the buyer (or the seller) for loss resulting from such breaches. The risk of such financial loss arising is thus shifted to the insurer.
In addition to covering losses for breaches of warranties, W&I insurance may also provide cover for breaches of general indemnities and general tax indemnities, if these are also provided by the seller under the SPA.
Strategic Uses
- Recourse: coverage is extensive, including generous periods of coverage of up to 7 years (from closing) in respect of fundamental and tax warranties and up to 3 years in respect of business warranties.
- Bid Differentiation: enhances and differentiates bids in auctions to help the buyer stand out and win the auction by offering the seller a clean exit.
- Reputation: enables claims to be made confidentially (to the insurer directly rather than through litigation), allowing the buyer and seller to maintain their reputation.
- Complex Sellers: provides additional financial security behind warranties where there are concerns about the collectability of claims under the SPA (such as disparate groups of sellers, potential dissolution of sellers after sale and/or distressed sellers).
- Relationship: helps protect key relationships by allowing the buyer to claim under the W&I insurance policy instead of seeking recourse from their joint venture partner or management team.
Aon Sidecar Asia Facility
A first in Asia, Aon Sidecar is an innovative solution that streamlines the process for follow-form excess capacity on placements, offering clients premium discounts and insurance capital diversification through pre-negotiated agreements with highly rated insurance carriers.
50% excess quota share capacity up to US$70 million at 10% premium discount on each Sidecar layer.
Advantages
- Simplified Access to Highly Rated Excess Co-insurance: Within 24 hours, Aon clients receive a commitment from S&P and AM Best (up to A+) rated insurers for excess insurance capacity up to US$70 million for Asia W&I placements.
- Discounted Premium: Clients enjoy a 10% premium discount to the followed quota share layer lead insurer’s policy premium.
- Diversified Insurance Portfolio: Aon clients diversify their exposure to insurers while avoiding the need for a time-consuming and exhaustive review by a new underwriter or an additional claims agreement party.
- Consistent Coverage and Claims Handling: No need to negotiate claims handling and payment amounts separately, as claims control is held by the followed quota share layer lead insurer’s policy.
Notes:
Certain parameters will apply, which include that the insured entity should be domiciled in Singapore, Hong Kong, South Korea or Japan, unless otherwise agreed on a special exception basis.
The 10% premium discount is relative to the followed policy on each layer where the Sidecar attaches.
