W&I Insurance Claims: Tips On Early Intervention And Current Trends In Australia

In the past 12 months there has been a reported increase in M&A activity globally and a corresponding uptake of Warranty & Indemnity (W&I) insurance products sold to an expanding market. This heightened activity increases the risk of W&I claims being made and notified to insurers. In this article we take a look at the steps required to be taken by insurers in resolving W&I insurance claims in the context of the present Australian and global landscapes.

Warranty and indemnity insurance - what is it?

In the 1990s, insurers identified that during the negotiation of a sale and purchase agreement there will often be disparity between parties over the warranties a seller is prepared to give and those a buyer is prepared to accept. W&I insurance (or Representations and Warranties Insurance, as it is known in the US) allows the parties to bridge that gap, providing some certainty to the warranties or indemnities provided by transferring the financial risk of any breach to the insurer.

W&I insurance can be purchased by either a buyer or seller, and its wording will be tailored to the specific transaction. The type of transactions in which W&I insurance is being taken out is becoming increasingly varied. Policies are ordinarily designed to sit back to back with the warranties or indemnities provided under the underlying transaction agreement (such as an SPA) although common exclusions will include losses relating to:

Projections and forward-looking statements; Known claims or circumstances which could give rise to a claim; Fraud or dishonesty by the insured; Consequential losses; Environmental pollution Fines and penalties; Post completion adjustments. Buy-side W&I policies are first-party policies that cover a buyer's loss arising from a breach of warranty or indemnity. A buyer may be particularly interested in purchasing a buy-side W&I policy in circumstances where the seller is unable or unwilling to provide the buyer with satisfactory financial protection, transferring the financial risks of any breach of warranty or indemnity to the insurer.

Sell-side W&I policies are third-party policies that cover a seller for losses arising from a buyer's claim against them for breach of warranty or based on an indemnity provided in the sale contract including costs of defending a claim. This type of policy is often used to facilitate a clean exit from the business by either reducing or eliminating the requirement for the seller to retain funds in escrow and...