Individual insurance solution for corporate transactions and real estate transactionsWarranty & indemnity insurance

A W&I insurance policy covers unknown transaction risks that can arise due to breach of seller guarantees or claims arising from indemnities. They regularly represent a central component of the (company) purchase agreement. The interests of seller and buyer are, by nature, diametrically opposed. A proper balance of interests between the parties can be achieved through a transfer of risk: The buyer is covered and finds a solvent debtor in the W&I insurer for violated seller guarantees. Here the liability of the seller is significantly minimized, in some cases it is even completely excluded. Thus a “clean exit” can be achieved through the W&I insurance.

W&I insurance features

W&I insurance covers financial losses that may result from breaches of warranty or indemnity claims arising from the sale of business agreement. For each transaction, custom W&I policies tailored to the respective guarantee catalogue are developed. With the objective of ensuring that coverage under the policy matches as closely as possible the guarantees and indemnities agreed in the purchase contract.

Areas of application of W&I insurance:

• Share deals / asset deals
• Private equity / strategic investors
• Corporate M&A / real estate
• Sellers with the objective of a “clean exit”

The tax contingent / indemnity insurance is a protection against known and unknown tax risks arising from a transaction or unexpected tax effects on the part of the policyholder. These risks can be transferred to the insurer if appropriate assessments of the risk indicated that the probability of occurrence is low. For known risks, the event is naturally known; only the amount or probability of occurrence are open.

This insurance solution is quite popular in M&A transactions when neither party wants to bear the risk. Or if the risk identified in the course of due diligence becomes a deal breaker.

POSI/ IPO insurance is the hedging of the prospectus liability risk with regard to the issue of securities on the capital market. Initially established primarily in English-speaking countries, the POSI (Public Offering of Securities Insurance) is also becoming increasingly popular in Germany. Since bonds also play an ever more important role as a financing instrument, the relevance of the appropriate coverage is also increasing.

According to the Securities Trading Act (WpHG) and the Stock Exchange Act (BörsG), the issuer is subject to strict liability for incorrect or omitted capital market information. Compensation claims may be submitted by investors (e.g. wrong information or incomplete information in the issue prospectus) or by third parties (e.g. issuing banks) for breach of statutory liability provisions. The POSI is intended to protect the issuer against these risks. In this regard, the insurance cover includes examination of an existing claim, defence against unjustified claims, as well as settlement of justified liability claims within the scope of prospectus liability.

The POSI is entered into by the company itself in favour of the issuer. It includes protection of executive bodies, senior executives and all employees and banks that were involved in the IPO. Classic D&O insurance does not cover specific liability risks of the company, in particular with regard to the securities issue itself. The POSI also includes comprehensive legal protection in criminal and non-compliance proceedings, as well as official or regulatory proceedings.

Contingent risk insurance provides insurance cover for risks that are identified before or during a transaction and are already known at the time the insurance is taken out. In this regard contingent risk insurance can be taken out in addition to regular W&I insurance (see above), but also as a stand-alone solution. To take out contingent risk insurance, the insurer must be provided with comprehensive risk information (in particular due diligence reports and risk assessments from reputable consultants). This enables the possible extent and probability of occurrence of the respective risk to be analysed. A frequent application is a pending lawsuit, the outcome of which can have a significant impact on the future of the target or its profitability. Here litigation buyout insurance enables transfer of risk and eliminates possible deal-breakers. The market for contingent risk insurance is considerably smaller than the market for W&I insurance. Depending on the risk, it consists of only five to seven insurers.

Possible risk areas:

• Risks related to property rights
• Tax risks
• Environmental hazards
• Technical risks
• Legal uncertainties
• Risks resulting from legal disputes

Litigation buyout insurance (LBO):

• Hedging of financial risks from threatened or pending legal disputes with uncertain outcome
• Assumption of possible negative consequences, prosecution and litigation costs
• Capacities up to €100 million
• Premiums between 2% and 10% of the sum insured

Environmental insurance:

• Cover of unknown environmental risks in conjunction with the sale of a company
• Can be used for real estate transactions or the sale of business premises as part of a corporate M&A transaction
• Coverage of known risks is possible if a certain amount of money is exceeded in an environmental rehabilitation project

Title insurance:

• Insurance of risks due to legal ambiguities relative to shares in the company
• Risks resulting, for example, from uncertain ownership structures or questions regarding the effective establishment of a company

Insurance DD is utilised ever more frequently during an M&A transaction. This involves an actuarial analysis of the existing insurance programmes. Thus any gaps in coverage are identified in good time prior to the transaction and post-closing solution recommendations with appropriate provisional rating are generated. Moreover, the existing, open and closed claims are considered and reviewed to identify risks for the potential buyer.

Insurance DD is usually initiated from the buyer side, as more and more financing banks or other financing entities now require adequate due diligence.

When taking out a W&I insurance policy, the report can also be made available to the transaction insurer in order to obtain any coverage improvements under the W&I policy.