An insurance policy covering losses arising from breaches of the seller's representations and warranties in a company sale agreement, transferring the indemnification risk to an insurer.
In a traditional company acquisition, if the seller’s representations and warranties prove false, the buyer claims against the seller. But what if the seller no longer has the money, has moved abroad, or is simply a fund that has been wound down? W&I insurance transfers that risk to an insurer, giving the buyer certainty and the seller a clean balance sheet.
Warranty & Indemnity (W&I) insurance — also known as representations and warranties (R&W) insurance — is a policy that covers the economic losses a buyer suffers as a result of breaches of the representations and warranties included in the SPA.
Instead of claiming against the seller, the buyer claims against the insurer. This fundamentally changes the deal dynamics: the seller receives a clean exit (no lingering contingencies) and the buyer has a solvent counterparty to claim against.
The most common type (90%+ of policies). The buyer takes out the policy and has the right to claim directly against the insurer without needing to first pursue the seller.
Less common. The seller takes out the policy to back their own representations and warranties. If the buyer claims, the seller pays and then seeks reimbursement from the insurer. It is more cumbersome and less efficient.
Buyer’s due diligence. The insurer requires that the buyer has conducted a thorough and professional due diligence. DD quality is a prerequisite for obtaining the policy.
Underwriting. The insurer reviews the due diligence, the SPA, and the representations and warranties. It identifies higher-risk areas and defines exclusions.
Policy issuance. Issued before or simultaneously with closing. The buyer pays the premium.
Coverage period. Typically 7 years for general representations and up to 7 years for tax representations (aligned with limitation periods).
Claim. If a covered breach is discovered, the buyer claims from the insurer pursuant to the policy procedure.
The use of W&I insurance has grown exponentially in Europe and is becoming established in the Spanish mid-market:
| Item | Typical range |
|---|---|
| Premium | 1%-2% of insured amount |
| Coverage limit | 10%-30% of Enterprise Value |
| Retention (deductible) | 0.5%-1% of Enterprise Value |
| Coverage period | 2-7 years depending on representation type |
For a 30 million transaction with 6 million coverage (20% of EV):
W&I policies do not cover:
The premium typically ranges from 1% to 2% of the insured amount. In competitive deals or sectors with good loss track records, it can drop to 0.8%. Costs have decreased in recent years due to greater supply of specialist insurers.
It is negotiable. Traditionally the buyer pays, but in competitive sale processes it is increasingly common for the seller to pay as an incentive. In some cases the cost is split between the parties.
No. Policies exclude known risks, fraud, price adjustments, and prospective liabilities. It is essential for the buyer to review exclusions with their insurance broker before binding the policy. Specific exclusions are negotiated during the underwriting process.
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