If you’re a seller or buyer looking for a method of de-risking the sale of shares in a private company, then warranty and indemnity insurance could be just what you need.
The products now available have come a long way in a relatively short period of time. Although warranty and indemnity insurance has been around in the market for some time, in its early days it was very much the exception rather than the rule, and the process of putting it in place could hinder rather than facilitate a transaction. Over the last few years however, the days of long detailed warranty negotiation over several weeks, with another law firm second guessing decisions and a rapidly expanding legal bill as a result, with a diminishing return, have all but disappeared.
Instead decisions are available swiftly, pricing is competitive, and the product is professionally tailored to the transaction in a timescale that matches the buyer and seller’s objectives.
What’s more, if you take out the increasingly popular buyer-side insurance, then the seller has no risk at all.
So what does this mean?
The net result of all of this is that rather than being something which practitioners were aware of but rarely encountered in practice, it is now a far more common feature of modern transactions.
Of course, life is never quite that simple. This is the law after all. There are always caveats.
- The product comes at a cost (usually around 1-2% of the cover required), and only insures unknown risks. Any known issues that are identified in due diligence will be excluded from the cover. So a seller will need either to adjust the price or to give indemnities for identified risks.
- The insurance isn’t a substitute for a thorough due diligence process or warranty negotiation. It is always better to identify issues in advance, rather than deal with them after the event – no matter how attractive the secondary legal and financial protection. Indeed, insurers will still expect the buyer and seller to go through the normal processes - the insurance is predicated on that.
But if you have a ‘high value’ deal, a property based, a deal where the sellers are trustees and therefore want no risk, or a deal where the seller is willing to reflect the premium cost in the sale price in order to have certainty, then warranty and indemnity insurance is worth looking at.