De Minimis
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De minimis is a latin phrase that is a shortening of “de minimis non curat lex” which means “the law does not concern itself with trifling matters”. In essence, it means that matters or issues under a certain value will not apply so it is often seen as a monetary threshold for weeding out small and insignificant matters. A de minimis is frequently structured into acquisition agreements so it stands to reason that it also occurs in W&I policies but the W&I policy does not follow the acquisition agreement. The de minimis in the W&I policy will be based off of factors such as the transaction size and the materiality thresholds used in the buy-side due diligence reports.
A de minimis under the W&I policy will often range between 0.1% to 0.05% of enterprise value so long as the seller has conducted its disclosure to this materiality threshold and the buyer has conducted its due diligence to this materiality. This will mean that the insured will not be able to bring a claim under the W&I policy for any issues that have a value below this amount. Consequently, many insurers will offer enhancements relating to the de minimis for an additional premium.
Perhaps the most common enhancement offered is offering a nil de minimis for the fundamental warranties. The fundamental warranties are significant warranties that, if breached, would likely lead to a large scale loss under the W&I policy and therefore the effectiveness of the de minimis against these warranties is low. As a result, insurers often offer this, combined with a nil retention, for a 5% additional premium or sometimes even offer it for free.
Increasingly insurers are being asked to offer a nil de minimis for the tax warranties and, where applicable, the tax indemnity. This is significantly more risky since many tax claims are likely to be small scale where a de minimis would be useful. Consequently, the cost of this enhancement can be significant.
Another increasingly popular enhancement around the de minimis is the ability for insureds to “bundle” claims together so their value as a whole counts towards the de minimis. Some insurers charge a small additional premium for this while others will have this as standard within their policy.