Warranty & Indemnity policies

Main Characteristics

• Warranty and indemnity protection in M&A operations
• Coverage for unknown liabilities at time of transaction
• May be extended to cover post-acquisition disputes
• Customisable solutions for buyers and sellers

Advantages of W&I policies over sureties and escrow accounts

• Sureties: These are personal guarantees provided by a third party (the guarantor) who undertakes to fulfil the obligations of the debtor in case of default. In the context of M&A transactions, a surety may be required from the buyer or the seller to guarantee fulfilment of contractual obligations. However, sureties may be costly and limit the financial capabilities of the parties involved.
• Escrow accounts: These are restricted accounts managed by an independent third party in which a sum of money is deposited as a guarantee for the fulfilment of certain contractual obligations. An escrow account guarantees that the necessary funds are available to cover possible losses arising from contractual breaches. However, using an escrow account ties up capital that could otherwise be put to productive use.

Advantages of W&I policies

• Transfer of the risk to a third party: Unlike sureties and accounts, W&I policies enable the business to transfer the risks associated with inaccurate representations or breaches of contractual warranties to an insurance company, relieving both parties of potential future liabilities. 
• Optimised liquidity: As it is not necessary to immobilise funds in an escrow account, financial resources can be used instead for other strategic or operational purposes.
• Facilitated negotiations: Having a W&I policy in place can accelerate negotiations, reduce disputes over guarantees and foster reciprocal trust between the parties. 
• Protection for both parties: The buyer is protected against potential financial losses, while the seller benefits from a “clean exit”, with limited post-sale liabilities.