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Warranty and Indemnity Insurance

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Warranty and Indemnity (W&I) Insurance (or Mergers and Acquisition insurance):
What is it, who is it suitable for and why is it important?

What is Warranty and Indemnity Insurance?

W&I insurance is an all-encompassing term representing a range of products intended to provide confidence to both parties in a business sale by covering the promises (Warranties and Indemnities) contained within the sale contracts.

Typically a single policy is arranged spanning 7 years (so no annual renewals), cover can be arranged for either the buyer or the seller of the business. Whichever party sets it up, both will benefit from its arrangement and it can be tailored to meet specific needs of each party.

W&I covers do not rely on fault or negligence, if a condition in the sales agreement turns out to be incorrect then the policy will respond.

Although due diligence is often done as part of a sale, it is by no means infallible. Having insurance in place removes the risk of there being any errors or omissions made during the transactions, or for circumstances that were simply not thought of at the time of sale.

Who is Warranty and Indemnity Insurance suitable for?

W&I Insurance is suitable for any party involved in a commercial transaction. This includes buyers, sellers and investors in mergers and acquisitions, as well as lenders and borrowers in financial transactions. It is particularly relevant in transactions where there is a significant amount of risk or uncertainty involved, such as, transactions involving new technologies, emerging markets or distressed assets.

This needn’t be a complete transfer of ownership, a transfer of shares within the existing board for example can still be insured if there is an agreement in place.

W&I Insurance offers a number of benefits to both buyers and sellers.

Seller benefits:

It provides a clean exit and allows the distribution or reinvestment of sale proceeds, or wind up fund
It eliminates the need for escrow, releasing sale proceeds earlier
It protects relationships should personnel transfer as part of the sale
It provides comfort for the seller should the buyer have a reputation for litigation
Insurers will provide legal counsel in the event of a potential claim; sourcing this yourself would be difficult and costly.

Buyer benefits:

It gives comfort to debt providers if concern exist over financial position of seller
It can be used as competitive advantage in an auction process
The buyer can go direct to policy, rather than initiate proceedings against the seller
Insurers can effectively guarantee the buyers diligence

Why is Warranty and Indemnity Insurance important?

There are several reasons why W&I Insurance matters. Firstly, it can provide protection to both the buyer and seller in a transaction, reducing the risk of financial loss and facilitating a smooth transaction. In addition, it can help bridge the gap between buyers and sellers in negotiations by providing a mechanism to address potential issues that may arise. And it can also help to increase deal certainty by providing a level of protection against unexpected liabilities or issues that may arise post-closing.

In summary, W&I Insurance is a valuable tool for mitigating risk and providing protection in commercial transactions.

By providing a mechanism to address potential issues and reduce the risk of financial loss, W&I Insurance can help both parties have more confidence in the transaction.

Aston Lark Warranty and Indemnity Insurance – the benefits

Tailored cover: Our policies are customised to each M&A (mergers and acquisitions) transaction, ensuring that the coverage is flexible enough to address the unique aspects of the deal
Warranties breach protection: W&I policies provide coverage for financial loss or liability resulting from a breach of representation or warranty in an M&A acquisition agreement
Clean exit assistance: Our policies can help minimise the impact of post-transaction claims against the seller by the buyer, enabling the seller to make a clean exit from their investment
Bid enhancement: In M&A transactions, indemnity caps can be a significant issue. Our coverage provides alternative recourse for a deal, allowing a buyer to accept a lower indemnity cap from a seller and making their bid more attractive to the latter.
Cross-border deals security: Cross-border M&A deals often have different indemnification expectations, leading to contrasting requirements for buyers and sellers. Our insurance provides security for either party.
Enhanced seller security: Companies in overseas jurisdictions may not offer sufficient post-indemnification claim security to buyers. Aston Lark’s policies offer access to stable and high-quality capital recourse, enhancing seller security.

Why should I inform my broker if I am selling my business?

It’s important to inform your broker once your business, or a percentage of your business, has changed hands. It’s possible for existing policies to become invalid or to go into ‘run-off’ automatically from the date of the transaction. This means that work done, or products sold from the day of the transaction would immediately become uninsured unless a replacement is sourced by the new owner.

If run-off cover doesn’t happen automatically then it may need to be arranged for the seller, depending on the type of insurance. Without this taking place, then the seller may find themselves uninsured if a claim comes through even after the sale date.

They key thing is that all different types of insurance policy will be affected in one way or another and action needs to be taken before the sale goes through.

Want to know more about Warranty and Indemnity Insurance?

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Why Aston Lark?

We’re specialists in Warranty and Indemnity Insurance and have expert teams who deal with the risks faced from mergers and acquisitions.

We understand that business sales are often very sensitive, and it’s common for both the broker and insurer to sign an NDA. We would be happy to arrange for this, providing you with peace of mind. We’re also happy to engage our insurer partners to join a meeting with yourself and/or other parties involved. We understand that no two deals are the same, which is why pricing, coverage, and deliverability are key elements when deciding to place your bespoke cover with us at Aston Lark

All we’d need to provide you with is a quote for Aston Lark W&I Insurance, which is an indication of the transaction value.

Why not contact us today so our specialist team can arrange bespoke coverage for your W&I needs?

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Aston Lark Limited is authorised and regulated by the Financial Conduct Authority, No. 307663, and registered in England and Wales, No. 02831010. Registered office: One Creechurch Place, London, United Kingdom, EC3A 5AF.

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