Warranty & Indemnity insurance gaining greater prevalence in M&As

Warranty & Indemnity (W&I) insurance is gaining greater significance in the undertaking of M&A deals, according to CMS’ fourth annual M&A Study.

In a review of 1,350 deals undertaken between 2007 and 2011, the study found that W&I insurance was taken out or contemplated in 10% of them. These findings are significant due to the fact that many transactions will not give rise to material concern about the ‘warranty gap’.

Speaking about the emerging prominence of W&I insurance in European M&A deals, CMS Partner, Martin Mendelssohn said: “W&I insurance has been available fro many years, but it is only recently that it has broken through as a genuine solution to the ‘warranty gap’ – when sellers are unable or unwilling to give warranties and indemnities.”

“The product is particularly attractive to financial sellers in controlled auction processes. They want a clean exit and are therefore unwilling to provide warranties and indemnities, but can provide a package for prospective buyers so they can make warranty claims against the insurer – rather than the seller.”

W&I insurance is attractive to buyers since it allows them to offer back-to-back cover for a full  set of well-negotiated warranties that have benefitted from disclosure and due diligence, and despite scepticism surrounding the ability of insurers to satisfy large claims, a growing claims history has helped to allay some of those fears.