Explaining Warranty & Indemnity Insurance
- Created: Tuesday, December 04 2018 14:11
Insurance policies in respect of certain aspects of corporate transactions are becoming more common in large Irish transactions. The most common type of transaction insurance is known as Warranty & Indemnity insurance. That is a specific insurance product to cover breaches of representations and warranties given by a seller in the sale of a business.
There are two types of Warranty & Indemnity insurance policies, which are as follows:
- Sellers can cover themselves to prevent sale proceeds being tied up in escrow accounts. This is known as a “seller-side” policy.
- Buyers can ensure that warranties have proper value, even if the seller is unable to pay a warranty claim, which arises sometime following completion of a transaction. This is known as a “buyer-side” policy.
The Warranty & Indemnity insurance policy, whether seller-side or buyer-side, will indemnify the insured for loss resulting from a breach of warranty or tax deed/covenant in a Share Purchase Agreement (known as the “SPA”). A seller-side policy covers the seller for its own innocent misrepresentations, whereas a buyer-side policy covers the buyer against the seller’s misrepresentations (innocent or otherwise). In a buyer-side policy, the buyer claims directly against the insurance policy and does not have to seek recourse against the seller. The majority of Warranty & Indemnity insurance policies are buyer-side.
The policy term will usually run from signing of the transaction for the full survival periods of the warranties and indemnities in the SPA.
It is important to be aware that most Warranty & Indemnity policies will exclude matters set out in the disclosure letter or due diligence and (in a seller-side policy) fraud by the seller. One issue can arise if a claim is required under a Warranty & Indemnity insurance policy, which is that in any corporate transaction, there is always facility to disclose against warranties and indemnities. For there to be a claim for breach of warranty/ indemnity, there would need to have been a failure to disclose. If there was a failure to disclose leading to a claim, then there may have been a breach of the disclosure obligation in the insurance contract, entitling the insurer to avoid liability. This is something that should be considered closely.