Warranty and Indemnity Insurance in Corporate Real Estate Transactions

In the context of corporate transactions, the allocation and mitigation of risk are central to deal structuring. One increasingly utilised product for managing transactional risk is Warranty and Indemnity ("W&I") insurance. 

This product provides coverage for financial losses arising from breaches of warranties and indemnities contained in share sale and purchase agreements ("SPA") and has become a key feature in both mid-market and large-scale M&A transactions and in particular corporate real estate deals.

Purpose and Function of W&I Insurance

W&I insurance operates as a risk transfer tool, shifting the exposure to unknown historic liabilities from the seller to an insurer. It enables sellers to achieve a cleaner exit, often with limited or no residual liability (save for in the case of fraud), while providing buyers with recourse beyond the contractual protections afforded under the SPA.

Policy Structures

W&I insurance may be structured in one of two ways:

Buy-side policy: The buyer is the insured party and may claim directly against the insurer for losses arising from breaches of warranty or indemnity.

Sell-side policy: The seller is the insured and is protected against claims brought by the buyer post-completion.

Buy-side policies are more prevalent as they offer direct protection to the buyer and afford sellers the ability to achieve a cleaner exit.

Process and Implementation Timeline

The placement of W&I insurance typically follows three main stages:

1. Initial Due Diligence and Broking
   Early engagement with a specialist insurance broker is essential. The broker reviews the scope of due diligence and prepares submissions to insurers to assess underwriting appetite.

2. Underwriting and Policy Structuring 
   Upon receiving non-binding offers from insurers, the proposed policyholder selects its preferred insurer (usually in conjunction with a recommendation and advice and support from the insurance broker). The underwriting process then begins and the insurers team conducts a detailed review of the buyer’s legal, financial, and operational due diligence. Policy terms, including coverage limits, exclusions, and premium structure, are also negotiated at this stage.

3. Finalisation and Binding
   Once terms are agreed, the policy is bound either prior to or shortly after signing the SPA, ensuring coverage is in place as soon as the transaction completes.

Key Considerations 

When evaluating W&I insurance, the intended policyholder should consider the following:

Exclusions and Limitations

Policies typically exclude:

1. Known risks identified in due diligence or disclosed in the transaction.
2. Forward-looking statements or future performance statements.
3. Certain property-specific risks unless mitigated through robust reporting.

Real Estate Specific Risk Areas

1. Environmental Compliance: Coverage may be available where a Phase 1 environmental report indicates low contamination risk.
2. Property Defects: Insurers may remove exclusions relating to property defects if a comprehensive technical survey reflects minimal inherent or latent defects.
3. Building Safety: Insurers take a more cautious approach to risks relating to cladding and fire safety but these risks may be insurable with appropriate documentation.
4. Title and Ownership: Insurers recognise the importance of title and ownership warranties and for complex matters, additional title insurance policies may be required.
5. Tenant Obligations: Misrepresentation of tenant covenants may be covered, though insolvency-related claims are generally excluded.

Due Diligence and Disclosure Requirements

Insurers expect a comprehensive and robust due diligence and disclosure process. Coverage is contingent on demonstrating this and insurers will not cover matters that have not been properly investigated.

Policy Limits and Thresholds

Policy limits typically range from 10% to 30% of the purchase price, though full coverage is available in certain cases. 

Premium Structure

Premiums generally range from 1% to 3% of the policy limit. However,pricing is influenced by deal complexity and the extent of due diligence.

Conclusion

W&I insurance is a valuable product which seeks to manage transactional risk and enhance deal certainty. Its effective deployment requires early engagement with brokers, rigorous due diligence, and a clear understanding of policy mechanics. When structured appropriately, W&I insurance can materially improve the risk profile of a transaction.  Whilst we do not advise on insurance at Howard Kennedy, we have relationships with brokers that we can connect our clients to should you wish to discuss any aspects further.

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