Warranty & Indemnity Insurance Glossary

There is a lot of jargon when it comes to W&I insurance and it can be very hard to understand all of this. The below table defines a number of key terms you'll likely come across within the world of W&I insurance.

Key Term	Definition
Acquisition Agreement	The agreement by which a transaction is effected. For example, these are usually share purchase agreements or asset purchase agreements. It doesn’t matter what the technical name of the acquisition agreement is called, a W&I policy will often define it as merely the “acquisition agreement”
Actual Knowledge	The knowledge that a person or entity actually has. This usually requires the knowledge to be undeniably known by the person or entity.
Additional Premium (AP)	A percentage of the premium that is added on top to pay for enhancements to the policy. So a 100k premium with a 5% additional premium on top will equate to 105k.
Affirmative Cover	Facts, matters or circumstances that are expressly written into the insurance policy as being covered. In the context of a W&I policy, identified issues are sometimes affirmatively covered for an additional premium.
Bordereau	A document produced by an insurer to report its performance such as all of its premiums earned and claims reported over a fixed amount of time (usually one month).
Bound	An insurance policy that has been signed by the insurer and is on risk. A bound policy is the successful culmination of the underwriting process
Boxing of Warranties	A clause in the acquisition agreement which states claims relating to specific themes can only be brought against breaches of specific warranties. For example, a claim for a loss related to tax might only be able to be brought under the tax warranties even if the loss could be as a result of a breach of a different warranty.
Break Fee	A fee paid to the W&I insurer in the event they conduct underwriting but the policy is not bound. A break fee is different from the underwriting fee as the break fee covers the W&I insurer’s internal costs rather than their legal costs. A break fee is only really applicable for auction processes where there is likely to be a number of competing buyers.
Bring Down	A disclosure process that is conducted at the closing of the transaction to provide the buyer with updated information that may impact the warranties.
Business Warranty	See “General Warranty”
Claim	Refers to a claim against an insurance policy. The claim will highlight how much money the Insured is claiming as well as why they feel the claim is valid under the insurance policy.
Claim Notice	A written notice provided by the insured to the insurer stating they are going to bring a claim. A claim notice will usually highlight the facts of the claim and which warranties have been breached.
Clean Trees	An underwriter or team of underwriters within a W&I insurance provider that work exclusively on one transaction. This means that the underwriter or team does not have any confidential knowledge that might hamper their one transaction.
Closing	The process of finalising the transaction and passing ownership of the target to the buyer. This usually occurs on one specific day.
Closing Accounts	A set of accounts that are drawn up at the closing of the transaction that are used to value the target company. This means the valuation of the target is not finalised until closing.
Closing Warranties	Warranties that are given by the seller at the closing of the transaction. These are usual a repetition of the warranties given at signing of the transaction. This means the buyer can rely on the warranties being true at two points in time: (i) when they commit to buying the target; and (ii) when they actually take over the target.
Completion	See “Closing”
Consequential Loss	A financial loss that is a consequence of the breach of warranty but not necessarily directly caused by it. Consequently loss is often treated similarly to indirect loss in that it is often not expressly covered under a W&I insurance policy.
Coverage Period	How long a policy is in effect for. This is the period of time that the policy is covering the warranties.
Data Room	An electronic space where documents can be uploaded so the buyer can review them during the course of their due diligence process.
De minimis	A monetary amount that all claims have to be above in order to be brought under the policy. For example, if there is a de minimis of £50,000 a claim of £45,000 would not be valid under the policy.
Deal Team Member	A person employed by the buyer or seller who is working on the transaction. Deal team members are important in the context of W&I insurance because deal team members sign the no claims declaration.
Deductible	See “Retention"
Deliverables	Conditions that need to be met by delivering something to the insurer. For example, paying the premium of the W&I policy is a deliverable. Sending a copy of the Data Room on a USB stick is also a deliverable under most W&I insurance policies.
Disclosure	The name given to the process of the seller giving information about the target company to the buyer. The disclosure process is usually done in a virtual data room and the buyer can ask questions about the process.
Due Diligence	The name given to the process of conducting research into a target company to expose any issues that might impact the buyer. Due diligence is often conducted by legal, financial and tax advisers of the buyer. They usually provide a written report which is reviewed by the W&I insurance provider duding the underwriting process.
EMEA Style Cover	A standard W&I policy as described on this website.
Enterprise Value	The value of the entire enterprise. This is often the price the buyer pays for the target but sometimes the enterprise value can differ from the actual value of the transaction.
Excess policy	An insurance policy that sits above a primary policy. This means that a primary policy with a limit of liability of £20m and an excess policy with a limit of liability of £20m would allow the policy holder to bring claims up to £40m under both policies combined.
Exclusion	A fact, matter or circumstance which explicitly cannot be claimed for under the policy. In a W&I insurance policy, the exclusions would often be identified risks within the target company.
Exclusivity	When a seller is only speaking to one potential buyer. The buyer is the exclusive buyer and has the first chance to complete the transaction and buy the target company.
Expense Agreement	A contractual document signed by the insured stating the insured will pay the underwriting fee (and possible break fee) to the insurer in the event they do not buy the W&I policy.
Fairly Disclosed	Used to decide what information disclosed by the sellers has been done so in a fair way. The buyers can’t claim for any issue that was fairly disclosed so the buyers want the definition to be very narrow so that fewer information falls under this definition. The sellers want the definition to be broad so more information is fairly disclosed which the buyer can’t claim for.
Framework Agreement	An agreement which sets out the bare bones of a transaction. These are common for more complex M&A transactions such as restructurings or investments. Often there may not be anything for sale so it is not called an “acquisition agreement”
Fundamental Warranty	A category of warranty that speaks to fundamental things about a company and the sellers’ ability to sell that company. For example, whether the sellers truly own the company. This is fundamental because if the sellers don’t truly own the company then the transaction becomes meaningless. In the context of W&I insurance, these are the most important warranties that have to be covered for the longest amount of time.
General Knowledge Qualifier	See “Knowledge Qualifier”. A general knowledge qualifier is a knowledge qualifier in one clause which qualifies all warranties given.
General Warranty	A standard warranty that is covered for the standard amount of time under the insurance policy. This is the opposite of an extended/fundamental/tax warranty which usually has an extended coverage period.
Gross Up	The concept of paying out more money for a claim than initially claimed for to account for the payment of tax levied upon the insurance payout. This is only applicable in certain jurisdictions.
Inception	The moment the policy is signed and comes into effect.
Indemnity	A promise by one party to pay another party if a specific liability or circumstance arises.
Indirect Loss	A financial loss that is not directly as a result of a breach of warranty but is still indirectly caused by the breach and therefore possibly covered under an insurance policy.
Information Memorandum	A document outlining the basic business operations of the target such as where the target is located and how many employees it has. The information memorandum is the first document seen by the W&I insurer and therefore forms the basis of the quote.
Insurance Broker	The agent corresponding between the W&I insurance provider and insured. A good insurance broker would explain in plain terms the W&I insurance policy and negotiate with the W&I insurer on behalf of their client.
Insurance Capacity Provider	A provider of insurance to managing general agents. These insurance capacity providers will allow their agents to bind insurance policies on their behalf.
Insurance Premium Tax (IPT)	A tax on insurance premiums payable by the insurer. IPT is applicable in most jurisdictions but some jurisdictions have no IPT (such as Sweden and Norway).
Insured	The entity that is to be insured under the policy. The Insured will received the money paid out under the insurance policy in the event of a successful claim.
Insurer	The entity who is providing the insurance capacity. Sometimes this can be made up of a number of companies and may also involve an agent offering insurance on behalf of a company or companies. Often, the companies involved in offering the insurance policy are called collectively the Insurer.
Interim Breach	A breach of warranty that occurs in the interim period. These breaches are not covered under W&I policies unless the insurer is offering New Breach Cover.
Interim Period	The period of time between signing and closing. Sometimes this can be a matter of days and sometimes this can be over 12 months long.
Investigation Costs	Costs incurred by the insured in to investigating a fact, matter or circumstance that eventually leads to a claim. Since investigating is likely to reduce the amount paid out under the claim, W&I insurers will generally cover investigation costs. Some insurers will have a specific cap to the amount of investigation costs that can be claimed but other insurers will allow whatever is reasonable.
Joinder	A short contractual document allowing a third party to sign up to the terms of a non-disclosure agreement as if they were a direct party to the agreement.
Knowledge Qualifier	A phrase that is inserted to a warranty to mean the warranty is subject to the knowledge of the warrantors. For example, a warranty of “the company has 10 employees” could be knowledge qualified if it is worded as “to the knowledge of the sellers, the company has 10 employees”. This is a very difficult thing to prove was breached and therefore more beneficial to insurers.
Knowledge Scrape	A feature that W& insurers can offer to deem knowledge qualifiers deleted so that the warranties are to be interpreted under the policy as if they are not knowledge qualified. This is very beneficial to the insured so often costs an additional premium.
Leakage	The financial changes to the accounts after the date the Locked Box Accounts are drawn up. Leakage can be used to adjust the buyer’s valuation paid for the target since their valuation is based on the Locked Box Accounts so changes have to be catered for. Leakage is not covered by W&I policies.
Limit of Liability	The monetary amount of cover each insurance policy provides. A policy with a limit of liability of 20 million would payout up to 20m for claims. If there is a claim greater than 20m then the policy would only pay out 20m
Locked Box Accounts	Accounts of the target that are finalised at a definite point of time before the signing of the transaction has taken place. This allows the buyer to provide a definitive valuation of the target but it also restricts the freedom of the sellers and the target before the transaction has been confirmed.
MAC	A material adverse change. Read: something massive happens that changes everything.
Managing General Agent	An agent acting on behalf of insurance companies who have authority to bind and manage insurance policies.
Materiality Qualifier	A phrase that is inserted to a warranty to mean the warranty is interpreted with reference to a concept of materiality. For example, a warranty of “there are no outstanding disputes” could be materiality qualified if it is worded as “there are no outstanding material disputes”. Materiality often is tied to a specific monetary amount.
Materiality Scrape	A feature that W& insurers can offer to deem materiality qualifiers deleted so that the warranties are to be interpreted under the policy as if they are not materiality qualified. This is very beneficial to the insured so often costs an additional premium.
Multiplied Loss	A financial loss that has been multiplied by the multiple used to value the company. For example, if a company is valued at ten times (x10) its EBITDA then a £1,000,000 loss from a breach of warranty would be £10,000,000.
Net of Commission	An insurance policy that doesn’t include any commission in the premium to be paid to the insurance broker. The broker will normally invoice their fee separately to the policy and this is usually due to regulatory compliance within certain jurisdictions.
New Breach Cover	Cover under the W&I policy for breaches of warranty that occur after signing the acquisition agreement but before the closing of the transaction. In other words, New Breach Cover is cover for an Interim Breach. This is uncommonly offered by insurers.
Nil Recourse	A situation where the seller does not provide any monetary remedy to a breach of the warranties they give. Therefore, it is important to note that the sellers can be liable for a breach of the warranties they give but if they have given nil recourse then they won’t have to pay any money for this liability.
No Claims Declaration	A written declaration provided by the insured which states that they are unaware of any breaches of warranties. A no claims declaration is usually provided on signing of the policy and then again at the closing of the transaction.
Non Binding Indication	A quotation of insurance terms provided by the insurer which is non-binding. This is also referred to as a “quote” or “term sheet”.
Non Disclosure Agreement	An agreement between parties stating they will not disclose any confidential information. Generally W&I insurers enter into NDAs before providing a quote.
Option Agreement	An agreement giving the buyer an option to do something. This option will usually be the option to buy shares in a company. This means the buyer doesn’t have to buy the shares but has to at least be offered them by the seller under the terms of the option agreement.
Policy	The written contract between the insurer and the insured. The policy will contain all the information around how much the limit of liability is, how big the retention is etc. as well as all of the terms and conditions governing the insurance.
Policy Number	A number created by the W&I insurer which is used as a serial number to refer to a specific insurance policy.
Premium	The amount paid by the insured for the policy. Premiums for W&I policies can range from four figures to multi-millions.
Primary Policy	A policy that pays out to the insured first, even when the insured has other policies that cover the same risk (called excess policies). Those other policies will only be tapped when the primary policy has reached its limit of liability.
Program of insurance	See “Tower of insurance”
Purchase Price Adjustment	A contractual mechanism used to adjust the purchase price based off closing accounts. This type of mechanism is not covered under W&I policies.
Put Option	An option agreement stating the sellers have the right to sell the shares to the buyer. This is a guaranteed right so the buyer has to follow through with buying the shares if the seller wants to exercise the put option. This is a requirement of M&A in France - all transactions are effected by a put option.
Quota Share	The participation of multiple insurers under one policy. For example, four insurers might participate on one policy under a quota share basis of 25% each.
Rate on Line	The premium expressed as a percentage of the limit of liability. For example, a 100k premium for a 10m limit of liability has a rate on line of 1%.
Retention	The amount of money that the insured will have to pay out of its own pocket on all claims before the insurer pays out. If you have ever bought car insurance, this is the same as an “excess” on car policies. This ensures that insurance providers and the insured entity have aligned interests in trying to minimise claims.
Retention (Dropping)	Dropping retentions start out at a high amount just like a fixed retention. If there are no claims that are above this retention within a fixed amount of time (usually 12 months) then the retention “drops” to a lower amount.
Retention (Fixed)	A fixed retention is a retention that does not change from claim to claim.
Retention (Tipping)	Tipping retentions initially function just like fixed retentions in the sense they are an amount the insured has to pay per claim before the insurer pays out. The difference is that when the insured has paid the full amount of the retention (either one one claim or after a culmination of claims) the retention “tips” to a lower amount meaning.
Rollover	Where the sellers of the target are buying a stake in the buying company of the target, this is called a roll over. So the sellers will still retain some ownership in the target but higher up in a holding company. Small rollovers can often be covered by the W&I insurance policy but where the seller is rolling over significantly, the W&I will pay out a reduced loss to only compensate the new buyers and not the sellers.
Seller-flip	The process whereby a seller engages the W&I insurer to start the underwriting process for a transaction where the final buyer is not known yet (usually because of an auction process). When the buyer becomes known, the W&I insurer will “flip” from working for the seller to working for the buyer.
Seller’s Knowledge	Where warranties are knowledge qualified, sometimes this is defined to include exactly whose knowledge is referred to as well as what kind of knowledge. Actual knowledge is one kind but buyers will often require the definition to include imputed and constructive knowledge.
SPA	A share purchase agreement. As the name suggests, this is an agreement to purchase shared in a company.
Subrogation	The process of being able to stand in the shoes of another person to bring a legal action. Insurers will require subrogation against the sellers so that in the event of a claim, the insurers can take the party at fault to court to recover some costs.
Synthetic Tax Covenant	A tax covenant that is not given by any party to the M&A transaction but instead deemed given in the insurance policy.
Synthetic Warranties	Warranties that are not actually given by a party to the M&A transaction but instead deemed to have been given by the insurance policy. Therefore, these warranties are only covered by the insurance policy and not any additional agreement such as the SPA.
Target	The company that is being bought. It is the target of the transaction.
Tax Covenant	Also often called a Tax Indemnity. This is a promise to pay another party (usually the buyer) in the event a certain tax becomes payable.
term	definition
Threshold	See “Retention”
Tower of insurance	A collection of insurance policies that cover the same risk. At the bottom of the tower is the primary policy that will pay out first and then, once that policy’s limit of liability has been reached, a number of excess policies will then pay out.
Transatlantic Cover	A style of coverage that sits in-between EMEA style cover and US style cover. It offers a few enhancements over traditional EMEA style cover such as nil de minimis and loss on an indemnity basis.
Underwriter	The person employed by the W&I insurer to evaluate a transaction and identify risks which are then catered for in the insurance policy.
Underwriting Call	A conference call that takes place during the underwriting process between the insurer and the insured and their respective advisors. On the call, the insurer asks a series of questions to confirm the robustness of the insured’s due diligence process. The underwriting call is not designed to catch out the insured but instead designed to gauge how much research has been done on the target company.
Underwriting Fee	A fee charged by the W&I insurer to cover the costs of their legal counsel who are engaged for the underwriting process. The underwriting fee is payable regardless of whether a policy is bound. Typically an underwriting fee will be anywhere from £20k to £60k. Some insurers don’t charge underwriting fees and others deduct the underwriting fees from the final premium paid, however, commonly the underwriting fee is itemised in the policy in addition to the premium.
Underwriting Questions	Questions formulated by the W&I insurer upon their review of the insured’s due diligence review. These questions will ask about potential issues or topics that might not have been reviewed enough. Questions are sent in tranches and can vary in quantity from 20 to over 100.
Underwriting Representative	This refers to an agent (often called a Managing General Agent) who has authority from big insurance providers to underwrite and offer insurance on behalf of them. This means that the policy is written and signed by the agent but any claim would be paid out by the insurance provider.
US Style Cover	Name given to a collection of enhancements that are generally standard for W&I policies written in the US but not standard in EMEA. These include, nil de minimis, no written responses to underwriting questions, indemnity basis of loss and a “light touch” underwriting process. The opposite of US style cover is EMEA style cover.
VDR	See “Data Room”
Warrantors	The people who are giving the warranties. Often the warrantors are the same people at the sellers but sometimes they can be different such as the management team of the target.
Warranty	A statement of fact that can be relied upon by the person/entity who is receiving the benefit of the warranty.
Warranty Deed	Warranties given in a document called a deed. This document is separate to the acquisition agreement. A warranty deed is usually used when the people giving the warranties are not the sellers (e.g management warrantors).