Warranty & Indemnity (“W&I”) Insurance is a tailored insurance product from AIG Mergers & Acquisitions Insurance team to cover breaches in representations and warranties given in the sale of a business.
In a transaction, either the buyer or the seller may be protected by W&I insurance. It aims to provide back-to-back cover for the seller’s liability under the Sale and Purchase Agreement (SPA). The W&I policy “steps into the shoes” of the seller by responding to claims brought by the buyer for a breach of warranty or claim under a tax indemnity.
A buyer policy indemnifies buyers for losses caused by breaches of warranties and tax indemnities given by the seller in the SPA. It enables the buyer to claim directly from the insurer without first having to pursue the seller.
A seller policy indemnifies sellers for losses resulting from claims made by the buyer for breaches of the warranties and tax indemnities given in the SPA.
Features and Benefits
W&I Insurance enables buyers to:
- Supplement protection for breaches of warranties both in terms of value and certainty of payment.
- Extend the duration of warranties, awarding buyers additional time to detect and report problems that may exist with the acquired business.
- Distinguish a bid in a competitive auction by negotiating more limited recourse from the sellers by supplementing the contractual recourse with insurance.
- Protect relationships with sellers who may become the buyers’ key employees or commercial business partners after the transaction.
W&I Insurance enables sellers to:
- Reduce the risk of contingent liabilities arising from future claims, allowing sellers to exit a business cleanly.
- Distribute all or most of the sale proceeds to investors or use proceeds to pay down existing debt: there is no need for an escrow account.
- Protect passive sellers who have not controlled or been actively involved in the management of the target business from unintentional non-disclosure or breaches of the SPA.
- Expedite a sale and potentially increase the purchase price by eliminating obstacles to closing, such as indemnity negotiations.
What is covered?
The policy, whether seller-side or buyer-side, will indemnify the insured for loss resulting from a breach of warranty or tax deed/covenant in a Sale and Purchase Agreement (SPA).
A seller-side policy covers the seller for its own innocent misrepresentations; a buyer-side policy covers the buyer against the seller’s misrepresentations (innocent or otherwise). The buyer claims directly against the insurance policy and does not have to seek recourse against the seller.
Representation and Warranties Indemnity policies are short-term products and are underwritten by AIG South Africa Limited, FSP No: 15805