Policy Dynamics
Many enhancements affect the dynamics of the final policy. These enhancements don’t impact the direct coverage of the policy but affect the terms of the policy which therefore will have a knock-on effect on the coverage.
| Enhancement | Explanation |
|---|---|
| New Breach Cover | This is the name given to covering the interim period between when the acquisition agreement is signed and when the transaction closes. Any new issues arising in this time will possibly be coverable under the W&I policy where the insurer has offered New Breach Cover. This is highly risky for insurers and therefore very rarely offered. However, for simple transactions such as real estate asset transfers, New Breach Cover can be more prevalent. Usually, the insured will have to pay a hefty additional premium. |
| Subrogation only in respect of fraud | Subrogation in the context of a W&I insurance policy is the ability for the W&I insurer to step into the shoes of the insured and sue third parties as if they were the insured. This means the insurer can sue parties such as customers and suppliers of the target. As a result, the insured will usually want to limit this subrogation ability to only if there has been fraud whereas insurers want to be able to subrogate in the event of wrongful doing, wilful misconduct and other lower conduct standards. However, insurers will generally limit their ability to subrogate to just fraud for no additional premium. After all, subrogation can ruin professional relationships so it is sometimes in the W&I insurer’s interests to do this. |
| Extended general warranty coverage period to 3 years | This is a simple enhancement to extend the policy’s coverage period from the market standard 2 year period to a 3 year period. Insurers often will offer this either for a 5% additional premium or, more commonly, no additional premium (free). |
| Cover of the tax warranties for 10 years | Some jurisdictions allow the tax authority to bring tax audits of a company’s accounts within 10 years rather than the more common six or seven years. Therefore, the insurer will often be asked to match this coverage period under the W&I policy. Most insurers can offer this but will generally do so for an additional premium. Jurisdictions where this is common are Germany and Norway. |
| Synthetic tax covenant | Tax covenants (also called tax indemnities) are a promise to pay in the event an issue arises in relation to tax. W&I insurers will often cover tax covenants given by the sellers. This enhancement asks the insurer to provide a tax covenant in the policy and the insured can claim against it as if it was given by the sellers. Most W&I insurers will generally offer this but for an additional premium of approximately 10%. |
| Nil de minimis and retention for the fundamental warranties | Since fundamental warranties are important warranties, any claims against them would likely be large and therefore the de minimis and retention are very ineffectual. Therefore, insurers will often be able to disapply the de minimis and retention (or provide a nil de minimis and retention) without increasing the risk. This is often offered for free but sometimes insurers will ask for a 5% additional premium. |