Warranty and Indemnity Insurance for M&A Transactions: A Guide for Business Owners

When a business is bought or sold, the seller gives the buyer a set of warranties — contractual assurances about the state of the business, its finances, legal compliance, intellectual property, and a range of other matters. If a warranty proves to be false, the buyer may have a contractual claim against the seller for the resulting loss. Warranty and Indemnity (W&I) insurance transfers the financial risk of a warranty breach from the parties to the transaction — typically from the seller, but sometimes from the buyer — to an insurer.

W&I insurance has moved rapidly from a niche product used in the largest corporate deals to a mainstream tool in mid-market transactions. For HNW business owners selling companies, HNW individuals acquiring businesses, family offices active in direct investment, and private equity-backed transactions, understanding W&I insurance is an important part of transaction planning.

This guide is not legal or financial advice. The correct structure for any transaction requires specialist legal, tax, and insurance input. This is a general introduction to the product and its role.

What Is Warranty and Indemnity Insurance?

W&I insurance indemnifies the insured against loss arising from a breach of the warranties or indemnities given in a sale and purchase agreement (SPA). The policy effectively replaces or supplements the counterparty's obligation to pay damages for a breach.

Sell-side W&I insurance is placed by the seller. If the buyer brings a warranty claim, the seller claims under their own W&I policy rather than paying out of their own resources. This protects the seller's ability to distribute sale proceeds without holding escrow, and removes the risk of post-completion litigation with the buyer.

Buy-side W&I insurance is placed by the buyer. It covers the buyer's loss directly if a warranty is breached, without requiring the buyer to pursue the seller. This is now the dominant structure in the UK and European mid-market. Buy-side policies do not require seller cooperation and are preferred by private equity sellers who wish to exit with no ongoing liability.

In practice, most modern M&A transactions using W&I insurance use the buy-side structure, with the seller limiting their own liability under the SPA to a modest nominal amount (or to nil, in a "synthetic" structure). The buyer's recourse is to the W&I insurer rather than to the seller personally.

Coverage Scope

A buy-side W&I policy covers loss arising from a breach of the business warranties in the SPA. Warranties typically cover a broad range of matters:

• Financial warranties: The accounts are true and fair; no undisclosed liabilities; the working capital is as stated.
• Tax warranties: All taxes have been paid; no outstanding assessments or disputes; the tax filings are materially accurate.
• Legal and compliance: No material litigation; the business is operating in compliance with applicable laws; licences and permits are valid.
• Employment: All employees are engaged on the terms disclosed; no undisclosed disputes or claims.
• Intellectual property: The business owns or has the right to use all necessary IP.
• Property: Title to property assets is as disclosed; leases are valid and subsisting.
• Environmental: No known or undisclosed environmental liabilities.

The scope of cover directly reflects the warranties given in the SPA. The insurer reviews the SPA, the disclosure letter (the document in which the seller qualifies the warranties against known issues), and the results of the buyer's due diligence during the underwriting process.

What W&I Insurance Does Not Cover

Certain categories of risk are typically excluded from W&I insurance:

• Known risks: Any matter identified during due diligence and disclosed in the disclosure letter is a known risk. The insurer will not cover what the buyer already knew when the policy was placed. This is why thorough due diligence simultaneously helps the buyer understand the business and identifies the specific risks that require separate treatment.
• Fraud by the insured: A buyer cannot claim under W&I insurance for loss caused by its own fraudulent act or wilful concealment.
• Pension scheme liabilities: Defined benefit pension fund deficits are frequently excluded or require specific negotiation and premium.
• Forward-looking warranties: Warranties about future performance rather than historical fact are generally uninsurable.
• Purchase price adjustments: W&I insurance does not cover a shortfall in working capital or other price adjustment mechanisms; these are commercial terms within the SPA.
• Specific known issues: Matters specifically flagged during due diligence as potential liabilities (litigation, tax disputes, environmental issues) are excluded from the general W&I policy. They may, however, be addressable through specific indemnity insurance (see below).

Tax Indemnity Insurance

Tax-specific risks identified during due diligence — a transaction structure that carries uncertain tax treatment, a historical capital gain on an asset, an HMRC investigation into a prior period's transfer pricing arrangements, R&D credit claims under challenge — may be covered by tax indemnity insurance (also called tax liability insurance).

Tax indemnity insurance can be placed on a standalone basis where a specific tax risk has been identified, and where the buyer and seller do not wish to allow that risk to prevent transaction completion or require a price reduction. The insurer takes a view on the tax position — typically based on a tax opinion from leading counsel — and provides cover for the quantified risk.

Specialist tax liability insurers include Euclid Transactional and Tokio Marine HCC, alongside the major W&I insurers operating through their tax liability divisions. Premiums are negotiated case by case and typically range from 3% to 10% of the insured liability depending on the risk.

Transaction Size and Policy Limits

W&I insurance is available across a broad range of deal sizes. In the UK and European market, deals from £5 million enterprise value upwards can typically obtain W&I cover; the sub-£5 million market is served by a growing number of SME-focused W&I products that use streamlined underwriting and offer standardised terms.

Policy limits are typically set as a percentage of the transaction enterprise value — commonly 10% to 30%, depending on buyer appetite and premium cost. For a £50 million deal, a policy limit of £7.5 million (15% of enterprise value) is common. The seller's contractual liability cap in the SPA is often set at a nominal amount (£1 or £100), with the buyer relying entirely on the insurance rather than the seller for recourse.

Premiums on buy-side policies in the current market typically range from 0.8% to 1.4% of the policy limit for straightforward deals, rising for complex, higher-risk, or emerging market transactions.

The Underwriting Process

W&I underwriting is relatively intensive compared with standard insurance products, reflecting the bespoke, transaction-specific nature of each policy. The key stages are:

1. Indicative terms: The broker obtains indicative quotes from several insurers based on a brief deal summary (deal size, sector, structure).
2. Due diligence review: Selected insurers review the due diligence reports, the SPA, and the disclosure letter. The insurer's underwriting team may ask questions of the deal team.
3. Underwriting call: A 60–90 minute call between the insurer's underwriter and the deal team to discuss the business, due diligence process, and key warranty areas.
4. Draft policy: The insurer provides a draft policy with agreed coverage terms, exclusions, and conditions.
5. Signing: The policy typically attaches to completion of the SPA, with premium paid at the same time.

The underwriting process typically takes one to two weeks for a mid-market deal, assuming deal documentation is in its final or near-final form. Starting the W&I process early — ideally as the SPA is being negotiated — avoids last-minute delays.

Specialist Brokers

W&I insurance is a specialist broking product, not available through general insurance brokers. The major brokers active in the UK and European mid-market include:

Lockton M&A has one of the largest dedicated M&A insurance broking practices in Europe, with particular strength in private equity and mid-market transactions.

Aon M&A and Transaction Solutions provides W&I, tax liability, and litigation risk insurance for cross-border transactions across all deal sizes.

Marsh operates a global transaction risk insurance practice with significant UK and European deal experience.

McGill and Partners is an independent Lloyd's broker with a specialist transaction risk practice, known for creative solutions on complex or unusual deals.

The choice of broker matters: a specialist M&A broker will know which insurers are most competitive for a given deal structure, sector, and geography, and will manage the underwriting process efficiently within transaction timelines.

W&I Insurance and Private Equity

The adoption of W&I insurance has been driven substantially by private equity. PE sellers insist on a clean exit with no ongoing warranty liability — W&I insurance makes this possible without disadvantaging the buyer. PE buyers use buy-side W&I policies as a standard deal tool.

For HNW individuals buying PE-owned businesses, W&I insurance should be treated as a standard element of deal planning, not an optional extra. A seller represented by a sophisticated PE fund will expect to be offered a W&I policy and may make it a condition of exclusivity.

R&W Insurance in Cross-Border Transactions

In US-originated transactions, the equivalent product is called Representations and Warranties (R&W) insurance. The fundamentals are the same as W&I, though US policies are typically written under New York law and reflect US corporate governance and tax concepts. For a UK buyer acquiring a US business, or a US seller exiting a UK portfolio company, the policy will typically be placed in the buyer's jurisdiction with appropriate governing law provisions.

For Asian, Middle Eastern, and other international transactions, W&I insurance is less standardised but increasingly available through Lloyd's syndicates and global insurers. Premium levels and coverage terms vary more widely than in the mature UK and European market.

Interaction with Escrow and Price Adjustment

W&I insurance frequently displaces or reduces escrow arrangements. Traditionally, a buyer might require the seller to hold back 10–20% of the purchase price in escrow for 12–24 months to secure warranty obligations. With W&I insurance in place — particularly in a synthetic structure where the seller's liability is nominal — escrow is often unnecessary, allowing the seller to receive 100% of proceeds at completion.

This has materially improved the economics of exits for founder-owners and family business sellers, for whom escrow represents a significant delayed receipt and re-investment opportunity cost.

Practical Considerations for Business Sellers

• Engage a W&I specialist broker at the time you appoint your corporate finance adviser — not after Heads of Terms are signed.
• Ensure due diligence is thorough and well-documented; gaps in due diligence create gaps in coverage.
• The disclosure letter should be carefully prepared alongside the SPA — the policy covers only what is warrantied, not what is specifically disclosed.
• Understand the claim notification period in the policy (typically 7 years for tax warranties, 3–5 years for business warranties).
• If specific risks are identified, explore tax indemnity or specific indemnity insurance alongside the general W&I policy.

How Global Investments Can Help

Global Investments works with HNW individuals and family offices who are active in direct business investment and disposal, including transactions where W&I insurance is a relevant or essential component. We can introduce clients to specialist M&A insurance brokers, assist with the broader transaction structure from a wealth management perspective, and ensure that the post-transaction planning — including reinvestment of sale proceeds, tax structuring, and trust planning — reflects the outcome of the transaction.

This guide is for general information only and does not constitute legal, tax, or insurance advice. Warranty and indemnity insurance is a complex, transaction-specific product. All decisions should be taken with qualified legal, tax, and insurance advisers with relevant M&A experience.