Warranty and Indemnity Insurance
Mergers and Acquisitions (M&A) continue to be a key strategy for corporations to drive growth and increase profitability of businesses domestically, cross-border and across various industry sectors.
Warranty & Indemnity (W&I) insurance enables deals through the transfer of potential specific risks relating to that M&A transaction, helping to both reduce uncertainty and to close deals more quickly.
This insurance can be either seller-side or buyer-side policy, with the following potential benefits:
Benefits for the seller
Enables a clean exit
Easing of deadlocks and facilitation of the sale
Immediate distribution of sales proceeds with a reduced need for escrows
A more attractive target
Potential for a higher valuation
Specialist liability coverage
Benefits for the buyer
Improved certainty of payment due to insurer's superior credit rating
Protects investment and supports lending for the transaction
Enhances the bid position and enables the transaction negotiations
Increases Board transaction comfort
Protects against future disputes involving target management
First party coverage
W&I insurance is a solution designed to transfer risks associated with mergers and acquisitions (M&A) to Insurers. This tailored product, whether held by the Buyer or Seller, provides financial cover to the Insured in the event of a breach of warranty, a claim under the tax covenant or a misrepresentation in the underlying acquisition agreement.
The buyer-side policy allows the Buyer to claim from the Insurer what they are contractually entitled to from the Seller under the acquisition agreement.
The policy can be used as a powerful deal tool to streamline negotiations between the parties. It can allow the Seller to limit its liability, whilst also giving the buyer the protection it requires through a W&I insurance policy.
Protection features
The result is a policy tailored to the specific transaction and with the following coverage features:
Losses resulting from a breach of a seller warranty or a seller's obligations in a tax deed of covenant
Costs associated with defending claims
Extended duration of cover compared to the survival period in the Sale Agreement
Flexibility with de minimis and thresholds compared to the Sale Agreement
Fraud on the part of the seller (buyer-side policy only)
Product Protection Features
Fusion’s aggregate policy limits typically range from USD / AUD 1m to 5m. 10% – 20% of the target’s enterprise value, although a policy limit of up to 100% of the enterprise value can be acquired.
Fusion applies a deductible of 1% of the enterprise value;
Fusion applies a de minimis of 0.1% of the enterprise value, with a minimum of AUD / USD 10,000, to losses under W&I policies which will match, or can be lower than, the amount set out in the transaction documents, thus enhancing the buyer’s position.
We do however expect the de minimis to be the same or higher than the financial materiality thresholds applied to the due diligence reports.
A W&I policy will provide protection for:
– 3 years following completion for general warranties, and;
– 7 years following completion for title and capacity warranties, tax warranties and claims under the tax indemnity.
Fusion applies market-standard exclusions to all W&I policies, including:
– any fact, matter or circumstances of which the buyer’s deal team members have ‘Actual Knowledge’;
– matters which are ‘Fairly Disclosed’ in the transaction documents, data room and due diligence reports;
– purchase price adjustments (other than those arising from warranty/indemnity claims) and leakage;
– the physical condition/design of properties;
– secondary tax liabilities, transfer pricing and the non-availability of carried forward tax-reliefs, fines, penalties & damages, stand-alone tax liability
– Forward-looking Statements
– Consequential Loss
– Excluded and partially covered warranties
The premium is a one-off cost determined by the limits of insurance required, the nature of the transaction, the jurisdictions, the industry sectors and the governing law of the acquisition agreement.
Average premium rates from 1.5% for real estate transactions in lower risk jurisdictions to 3% of the policy limit for higher risk transactions. For certain deals with higher risk exposures, the rates can increase to between 3% and 5%.
Fusion will require a Legal & Administration fee expense agreement to be entered into before commencing formal underwriting. This is to cover the cost of instructing external counsel and the platform administration. This fee is AU$ / US$ 1,500 before applicable taxes. the legal fee is charged in addition to the premium.
Fusion’s aggregate policy limits typically range from AUD 5m to 35m in the Pacific Region and USD 10m to 50m in Asia. 10% – 30% of the target’s enterprise value, although a policy limit of up to 100% of the enterprise value can be acquired.
The type of deductible applied to claims under W&I policies varies depending on the nature of the deal:
– For operational transactions, Fusion usually applies a deductible of 0.25% – 1% of the enterprise value;
– For real estate transactions, Fusion usually applies a deductible of 0.10% – 0.5% of the enterprise value.
– Fusion can also consider tipping to 1% or tipping to 0.5% options for certain transactions.
Fusion applies a de minimis of 0.1% or 0.05% of the enterprise value to losses under W&I policies which will match, or can be lower than, the amount set out in the transaction documents, thus enhancing the buyer’s position.
We do however expect the de minimis to be the same or higher than the financial materiality thresholds applied to the due diligence reports.
A W&I policy will typically provides protection for:
– 2 or 3 years following completion for general warranties, and;
– 7 years following completion for title and capacity warranties, tax warranties and claims under the tax indemnity.
Fusion applies market-standard exclusions to all W&I policies, including:
– any fact, matter or circumstances of which the buyer’s deal team members have ‘Actual Knowledge’;
– matters which are ‘Fairly Disclosed’ in the transaction documents, data room and due diligence reports;
– purchase price adjustments (other than those arising from warranty/indemnity claims) and leakage;
– the physical condition/design of properties;
– secondary tax liabilities, transfer pricing and the non-availability of carried forward tax-reliefs, fines, penalties & damages, stand-alone tax liability
– Forward-looking Statements
– Consequential Loss
– Excluded and partially covered warranties
The premium is a one-off cost determined by the limits of insurance required, the nature of the transaction, the jurisdictions, the industry sectors and the governing law of the acquisition agreement.
Average premium rates from 0.8% for real estate transactions in lower risk jurisdictions to 3% of the policy limit for higher risk transactions. For certain deals with higher risk exposures, the rates can increase to between 3% and 5%.
Fusion will require a Legal fee expense agreement to be entered into before commencing formal underwriting. This is to cover the cost of instructing external counsel. Legal fee typically range from AU$ / US$ 30,000 – AU$ / US$60,000. The legal fee is charged in addition to the premium.
Product Protection Features
Fusion’s aggregate policy limits typically range from USD / AUD 1m to 5m. 10% – 20% of the target’s enterprise value, although a policy limit of up to 100% of the enterprise value can be acquired.
Fusion applies a deductible of 1% of the enterprise value;
Fusion applies a de minimis of 0.1% of the enterprise value, with a minimum of AUD / USD 10,000, to losses under W&I policies which will match, or can be lower than, the amount set out in the transaction documents, thus enhancing the buyer’s position.
We do however expect the de minimis to be the same or higher than the financial materiality thresholds applied to the due diligence reports.
A W&I policy will provide protection for:
– 3 years following completion for general warranties, and;
– 7 years following completion for title and capacity warranties, tax warranties and claims under the tax indemnity.
Fusion applies market-standard exclusions to all W&I policies, including:
– any fact, matter or circumstances of which the buyer’s deal team members have ‘Actual Knowledge’;
– matters which are ‘Fairly Disclosed’ in the transaction documents, data room and due diligence reports;
– purchase price adjustments (other than those arising from warranty/indemnity claims) and leakage;
– the physical condition/design of properties;
– secondary tax liabilities, transfer pricing and the non-availability of carried forward tax-reliefs, fines, penalties & damages, stand-alone tax liability
– Forward-looking Statements
– Consequential Loss
– Excluded and partially covered warranties
The premium is a one-off cost determined by the limits of insurance required, the nature of the transaction, the jurisdictions, the industry sectors and the governing law of the acquisition agreement.
Average premium rates from 1.5% for real estate transactions in lower risk jurisdictions to 3% of the policy limit for higher risk transactions. For certain deals with higher risk exposures, the rates can increase to between 3% and 5%.
Fusion will require a Legal & Administration fee expense agreement to be entered into before commencing formal underwriting. This is to cover the cost of instructing external counsel and the platform administration. This fee is AU$ / US$ 1,500 before applicable taxes. the legal fee is charged in addition to the premium.
Fusion’s aggregate policy limits typically range from AUD 5m to 35m in the Pacific Region and USD 10m to 50m in Asia. 10% – 30% of the target’s enterprise value, although a policy limit of up to 100% of the enterprise value can be acquired.
The type of deductible applied to claims under W&I policies varies depending on the nature of the deal:
– For operational transactions, Fusion usually applies a deductible of 0.25% – 1% of the enterprise value;
– For real estate transactions, Fusion usually applies a deductible of 0.10% – 0.5% of the enterprise value.
– Fusion can also consider tipping to 1% or tipping to 0.5% options for certain transactions.
Fusion applies a de minimis of 0.1% or 0.05% of the enterprise value to losses under W&I policies which will match, or can be lower than, the amount set out in the transaction documents, thus enhancing the buyer’s position.
We do however expect the de minimis to be the same or higher than the financial materiality thresholds applied to the due diligence reports.
A W&I policy will typically provides protection for:
– 2 or 3 years following completion for general warranties, and;
– 7 years following completion for title and capacity warranties, tax warranties and claims under the tax indemnity.
Fusion applies market-standard exclusions to all W&I policies, including:
– any fact, matter or circumstances of which the buyer’s deal team members have ‘Actual Knowledge’;
– matters which are ‘Fairly Disclosed’ in the transaction documents, data room and due diligence reports;
– purchase price adjustments (other than those arising from warranty/indemnity claims) and leakage;
– the physical condition/design of properties;
– secondary tax liabilities, transfer pricing and the non-availability of carried forward tax-reliefs, fines, penalties & damages, stand-alone tax liability
– Forward-looking Statements
– Consequential Loss
– Excluded and partially covered warranties
The premium is a one-off cost determined by the limits of insurance required, the nature of the transaction, the jurisdictions, the industry sectors and the governing law of the acquisition agreement.
Average premium rates from 0.8% for real estate transactions in lower risk jurisdictions to 3% of the policy limit for higher risk transactions. For certain deals with higher risk exposures, the rates can increase to between 3% and 5%.
Fusion will require a Legal fee expense agreement to be entered into before commencing formal underwriting. This is to cover the cost of instructing external counsel. Legal fee typically range from AU$ / US$ 30,000 – AU$ / US$60,000. The legal fee is charged in addition to the premium.
How does Warranty & Indemnity Insurance work?
This process usually takes between 1 and 2 days.
1 Set Up Stage
The Seller or the Buyer and their Advisors set up the Project on our online SME M&A platform, with a view to purchasing W&I protection for their transaction.
2 Quote Pack Stage
The seller uploads its disclosure information and fills out the Digital Disclosure Form online. The Buyer uploads its due diligence reports and SPA; and fills out the Digital Due Diligence Form online. Fusion delivers a Quote Pack offer to the Insured and its Advisor.
3 Binder Pack Stage
The forms, SPA, disclosure information and due diligence reports are updated. Fusion provides a Binder Pack offer.
4 Signing and Completion Stage.
The Signed SPA is uploaded and the Signing NDA is executed online. The Fusion policy is issued.
Transaction completion is confirmed and the Completion NCD is signed online.