Warranty and Indemnity Insurance

The M&A market has recently been characterised by numerous economic challenges. The combination of high inflation, sharply rising interest rates and uncertain economic prospects has led to a significant slowdown in M&A activity compared with previous years. 

This applied not only to the absolute number of successfully completed transactions, but also to transaction volumes, which settled at levels significantly below those of the previous year.

It is to be expected that, in view of rising acquisition costs, investors will become even more risk-averse and will increasingly rely on protective measures such as warranty and indemnity insurance to safeguard their investments. 

This does not always involve spectacular, large-scale transactions; the search for successors for medium-sized companies often leads to a takeover. For many medium-sized companies seeking to intensify their production or expand their services, external growth through company acquisitions represents an attractive option.

However, such acquisitions and mergers often carry high risks. A common scenario is that the sold or merged company does not deliver what the former owner promised. Benedict Prinzenberg, Head of Funk M&A and Tax Solutions, explains: “In most cases, such breaches of warranty result from inaccurate financial information, undisclosed legal proceedings, intellectual property infringements, tax reassessments, the recovery of state aid, breaches of subsidy regulations and compliance issues.”
 

There is a strong desire among all parties involved for transaction certainty during the M&A process. Buyers, above all, want to protect themselves against unpleasant surprises, whilst sellers are looking for a way to minimise their liability for breaches of warranty. The insurance industry has developed a solution that addresses both sets of interests: W&I insurance protects buyers against potential risks arising from breaches of warranties in connection with the seller’s purchase agreement warranties. 

W&I insurance is almost always taken out by the buyer. Thanks to this cover, in the event of a claim, they do not have to deal with the seller but have a direct claim against the insurer. Furthermore, buyers are protected even if the seller has intentionally or fraudulently provided false warranties or withheld relevant information. In such circumstances, the insurer may seek recourse against the seller, a course of action not otherwise provided for.
 

Funk has been developing bespoke W&I cover for many years. Thanks to their close relationship with clients and excellent market knowledge, the experts create tailor-made solutions. “Our experts identify the ideal cover structure for the planned transaction for both buyers and sellers and assist in selecting the right insurer,” says Prinzenberg.

It is advisable to involve the insurance experts as early as possible, but at the latest once the outline of the transaction’s warranty catalogue is clear. This enables them to draw up optimal proposals, as taking out such cover can significantly influence the quality of the agreed warranties. Furthermore, an intensive exchange of information speeds up the process and reduces the workload. For those who nevertheless decide at a very late stage: in special cases, the advisers can still develop W&I cover even after contracts have been signed and prevent their clients from suffering financial losses.