WARRANTY & INDEMNITY POLICY
Any acquisition or divestment transaction requires careful analysis of the potential risks involved, especially in the context in which domestic and international players are active in the global market today. Given also the difficulty of dealing with damages and the consequences of defaulting on R&Ws (Representations and Warranties), this need takes the form of insurance solutions that can protect the value of the investment.
Among the different types of warranties negotiated between buyer and seller during an extraordinary finance transaction, Area Brokers Industria selects for its clients the most innovative Warranty & Indemnity policies, insurance solutions that go hand in hand with M&A transactions to shelter those involved.
WHAT IS W&I POLICY?
Warranty & Indemnity insurance policy is a strategic tool for transferring to the insurance market the risk associated with possible future economic losses resulting from a breach of the Representations and Warranties that the selling party issues to the buying party, contained within the transaction’s Sell & Purchase Agreement.
The purpose of the W&I policy is to indemnify the insured against any economic loss resulting from a breach of reps & warranties issued by the selling party in the purchase and sale contract. The W&I policy can be taken out at the same time or following the conclusion of the sales contract, either by the seller or the buyer.
WHAT ARE THE BENEFITS OF TAKING OUT A W&I POLICY?
W&I policy is a key solution for moving confidently in today’s complex, broad and interconnected marketplace. Insurance acts as a real negotiating tool or facilitating element for closing the deal. The benefits, in fact, are many for both the buyer and the seller.
WHAT ARE THE ADVANTAGES FOR THE SELLER?
In policies taken out by the seller, the seller transfers the risk of damages related to noncompliance with R&W to a third party who, in return for payment of a premium, assumes the obligation to hold the buyer harmless.
In M&A transactions, W&I insurance enables:
- fully transfer the seller’s risk to the insurer, unlike other types of guarantees (contractual, escrow or surety) for which losses would remain with the seller in addition to the cost of the guarantee;
- freely distribute the proceeds of the sale to shareholders, avoiding significant post-closing risks by offering a clean-exit opportunity to investment funds potentially involved in the transaction;
- To obtain greater proceeds from the sale;
- Ensuring solvency.
WHAT ARE THE BENEFITS TO THE BUYER?
In policies taken out by the buyer, if damage occurs that does not exceed the maximum liability limit agreed upon in the acquisition contract, the seller is obligated to indemnify the buyer. Where, on the other hand, the damage exceeds the agreed limit, the obligation to indemnify will rest with the insurance company within the liability limits agreed with it.
Specifically, this type of insurance allows:
- Increase limit and/or duration of contractual guarantees obtained in negotiations;
- Differentiating the bidding in an auction-based process;
- Facilitate vendor relations, especially in case there are multiple vendors;
- To facilitate the maintenance of good relations between the parties for possible future partnerships;
- Facilitate recourse to the financing needed to close the operation;
- Streamline the compensation mechanism by creating a direct relationship between buyer and insurer in the event of a claim.
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