Limit of Liability
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Limits of liability are the cornerstone of any insurance policy because the limit governs how much the insurer can pay out under a policy. The amount of limit is what’s bought by the insured. For example, if the insured has only purchased a limit of liability of £10m then if a loss of £20m occurs the insured will only be able to recover a maximum of £10m from the insurers. In basic terms, the limit is the amount the insurers are on risk for.
The most popular limits sold for W&I policies are around 10% of the enterprise value of the target but limits up to around 50% are frequently sold. Unless the enterprise value is very small (e.g. single digit millions) there is little point buying more than 50% as a limit since the chances of any loss arising that is greater than 50% of the enterprise value is going to be very small.
The limit of liability will apply against all claims that are applicable under the policy. However, sometimes insureds might desire an increased limit of liability for specific areas. Most commonly, insureds may purchase an extended limit of liability for the fundamental warranties since breaches of the fundamental warranties are likely to lead to significant losses. This is often called “top-up fundamental cover” since the limit of liability in relation to the fundamental warranties is being “topped-up”. For companies with big tax related issues, the limit of liability can be increased for tax claims only.