The Basics
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W&I In A Nutshell
It is assumed that, if you have made your way here, you probably know a bit about mergers and acquisitions and a bit about insurance. Nearly every M&A deal is structured around an agreement to buy the underlying company or assets (called the Target). This agreement, often referred to a share purchase agreement (SPA) will be made between the buyer and the seller. The agreement will contain all of the key transaction points in it such as the purchase price of the target. The agreement will also contain a section of warranties. The seller will provide warranties to the buyer so these warranties are "given" by the seller to the buyer. There are representations of fact that the buyer can rely on when entering into the transaction.
For example, a very basic warranty might be:
The target has 10 employees.
The buyer would be able to rely on the warranty above. This means that if the buyer successfully bought the target and found out that actually it has 11 employees then the seller has breached this warranty because it isn't true. In the breaching of this warranty, the buyer might be able to argue that it would have paid less for the target if it had known that there were 11 employees and not 10. Consequently, the buyer would be able to recover that difference in purchase price under the agreement which means that the seller would have to compensate the buyer.
A W&I insurance policy covers those warranties about the target. So this means that when a warranty has been breached by the seller and the buyer is due compensation as a result, it is the insurer providing the W&I insurance policy, and not the seller, that will pay the buyer. This is a very simple example and, as you'll see, there are so many other factors that can affect the buyer, seller and W&I insurance provider but the key point to remember here is that the W&I insurance policy covers the warranties of a transaction agreement.