Legal Update: Navigating Risks with W&I Insurance
Overview of W&I Insurance
Warranty and indemnity insurance (“W&I Insurance”) has been increasingly considered in the context of mergers and acquisitions (“M&A”) transactions for the purposes of minimising the exposure of parties in transactions, especially where the seller intends to make a clean exit. Recently, Eversheds Sutherland and Lockton Transactional Risks, which is the world’s largest privately held, independent insurance broker, released a report titled “Bringing Risk to Light” which seeks to provide greater understanding on the due diligence in the context of insured deals (the “Report”).
The Report maintains that while a W&I Insurance minimises the exposure of parties in a M&A transaction, insurers expect to see buyers and sellers negotiating the transaction at arm’s length, with sellers conducting thorough questions-and-answer process (“Q&A”) and disclosure exercises and buyers undertaking comprehensive due diligence. In fact, from the perspective of W&I insurers, due diligence information is the foundation of W&I insurance.
This e-Bulletin summarises the requirements of insurers on the due diligence to be conducted in relation to a proposed M&A transaction where parties intend to procure W&I insurance, as set out in the Report. More details can be found in the attached Note.
What this means for you
- Baseline requirement for due diligence: The golden rule is that if parties are seeking W&I insurance cover on an element, then due diligence must be performed, documented and provided to insurers for review. This is especially so on the legal, finance and tax fronts.
- External vs in-house due diligence: Insurers prefer to see external advisers opine on matters in due diligence, especially for tax. However, insurers are more accepting of internal legal and financial due diligence and where in-house due diligence is conducted, a documented report must be provided.
- Due diligence in multi-jurisdictional deals: Due to the inefficiency in time and cost of carrying out thorough due diligence exercises in multi-jurisdictional deals, W&I insurers generally expect full due diligence only for jurisdictions accounting for over 5% of the group’s turnover, and for certain jurisdictions with significant activities. Desktop reviews’ or high-level due diligence on more minor regions is generally fine if it is justifiable in terms of their importance and financial value in the overall target business. If no due diligence has been undertaken at all, the insurer will likely exclude cover for the activities in that jurisdiction.
- Vendor and buyer due diligence: W&I insurers typically require some form of buy-side due diligence to be conducted, even when vendor due diligence has been undertaken.
- Sell-side vs buy-side W&I policy: W&I policies are typically procured by buyers. Sell-side W&I policies may not be available for larger and more complex transactions.
- Due diligence in specific areas: Expectations on specific due diligence will depend on the type of business of the target company. There may be specific requirements for certain specialist areas such as information technology, insurance, environment, data privacy and in regulated industries. More details can be found in the attached Note.
- Affirmative coverage for known issues: W&I insurance generally do not cover known risks, which include issues uncovered during the due diligence exercise. However, insurers are increasingly willing to provide cover for risk areas where there is technical uncertainty surrounding the risk, but the insurer is satisfied that the risk is low in practice. If affirmative cover cannot be obtained, a buyer can look to alternatives such as seeking a price reduction, requiring a retention or having a specific indemnity.
Based on our experience, the vast majority of the Singapore M&A transactions are still uninsured deals. However, W&I Insurance are now more commonly considered in the context of Singapore M&A transactions, usually on the request of the seller which wishes to achieve a clean exit and where the transaction value (and accordingly, the potential exposure of the seller under the sale and purchase agreement) is high. The Eversheds Harry Elias team is experienced in advising on insured M&A transactions.
For further information contact:
Partner & Head, Corporate and Financial Services
+65 6361 9845
+65 6361 9363
+65 6361 9305