Warranties in W&I Insurance
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What Are Warranties?
Warranty and Indemnity insurance covers warranties. If the warranties are breached, then it could be that the W&I insurance policy will pay out. Therefore, in order for a W&I policy to exist, there has to be an agreement that contains warranties such as a Share Purchase Agreement (SPA) or Investment Agreement (IA). The W&I policy will sit back-to-back with the agreement and provide cover for the warranties given in that agreement.
Warranties in Transaction Agreements
Warranties are statements of fact given by the parties to a transaction but for the purposes of W&I insurance, we are only interested in the warranties given by the seller. The seller provides many warranties about the target company that is being sold. The buyer can then rely upon these statements when entering into the transaction. The buyer’s ability to rely on these facts is important because they can use these facts to decide upon their valuation of the company or even whether they should proceed with the deal. Therefore it is important to any insurer who will cover the warranties that they are correct or at least qualified in a way to minimise the impact of any error (we talk more about that below).
Types of Warranties
There is no limit on the amount of warranties the sellers can give or what topics the warranties can be about but there are generally accepted forms of warranties. Warranties are often contained in their own schedule to the agreement. This means there will be a clause in the agreement which brings all of the warranties in the schedule into effect.
Commonly, the first three or four clauses of the warranty schedule are called the “fundamental warranties” since these speak to important topics such as the seller’s ownership of the target and their ability to sell the target. There will also be clauses dedicated to warranties about the target’s accounts, the tax regime, employment, information technology, intellectual property, real estate and material contracts.
Insurer and Buyer Perspectives
Insurers want the warranties to be “seller-Friendly” because insurers are putting themselves on the hook for what the seller would ordinary pay. Therefore, any protection in the agreement that is advantageous to the sellers will also be advantageous to the insurers. However, the insured will want the warranties to be “buyer-friendly” which may allow them to claim more under the W&I insurance policy. If an agreement is too buyer-friendly, the insurer can make comments in the policy that deem the agreement amended. These are “synthetic” comments since they are only deemed to have occurred and could include re-drafting or deleting warranties. This means that for assessing whether a claim is payable, the agreement needs to be read as if the insurer’s comments were included in the drafting of the agreement.