M&A Insurance – Transfer of Liability to the Insurance

In the last years, insurance was taken out on many transactions to cover the risk of warranty breaches by the seller. In recent years, the trend has become more and more common, also in the German-speaking countries. To the knowledge of AIG, approximately 100 warranty or warranty & indemnity insurance policies (including real estate and corporate deals) were taken out in Germany in 2015. AIG has underwritten a significant portion of these insurances, approximately 60 in total.

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Both the seller and the buyer profit from the insurance. While it enables the seller to limit his liability, the insurance provides the buyer with a contracting partner of excellent credit-worthiness. Please find additional information in our M&A Claims Report 2016 and follow this link.

In most cases, sellers want to sell their business at the highest possible valuation which is ideally immediately disbursed to the company’s shareholders directly after the transaction. Special-purpose vehicles established for the purpose of the sale are frequently liquidated thereafter. Generally, though, this is only possible if the seller does not have to use a considerable part of the capital to form provisions for potential breaches of warranties. These warranties, however, are of particular importance for potential buyers.

In many cases, a good solution to this issue is to take out a warranty & indemnity insurance. The client (either the buying or the selling party in the corporate transaction) pays a premium to the insurance and the insurance assumes the liability for the seller’s warranty and indemnity claims under the sale and purchase agreement.

The insurance solutions are often designed in a way that the seller assumes a maximum liable amount of approximately one percent of the transaction values. This liability cap often equals the excess amount (or retention amount) of the policy. If damages arise from breaches of warranties, the insurance company assumes liability up to a specified insured sum. The insurance premium to be paid by clients is approximately 1.3 percent to 1.75 percent of the insured sum on average, with excess being 0.5 to 1 percent of the transaction volume.

In the current seller’s market, the use of warranty and indemnity insurances will continue to grow. AIG expects that, in addition to attracting private equity exit situations, this insurance solution will also become more and more interesting for corporates, family owners, liquidators and strategic buyers. Because the product is rather new, it is important to monitor the development of claims and premiums in the long term.

If you are interested in additional information, please do not hesitate to get in touch with your local contact person.