In the last article, we have discussed why Warranties & Indemnities (W&I) Insurance is important. We now will discuss the products features, its uses and advantages.
One of the leading insurers for this line of business has reported that nearly half of the claims are reported in the first year and about 74% of the claims are reported in the first 18 months. About 28% of claims were reported under breach of Financial Statements warranties and 13% for breach of tax statements.
Price for the policy is determined based on transaction Jurisdiction, transaction size, countries of operation, level of deductibles and Industry. The placement process typically takes up to 3 weeks but the process can be compressed based on deal timelines. The premium decided shall be a one-time payment for a policy that can last for up to 7 years.
These transactions are reinsurance based and the reinsurers are typically European based companies and limits can be made available in India by a fronting partner in compliance with IRDAI (Insurance Regulatory and Development Authority of India) norms. An experienced insurance broker would be able to facilitate this process. It is best to check with an advisor/broker once a draft Sales and Purchase agreement is available. An advisor/broker can comment on coverage available under the policy with the draft documents and would navigate you through the process.
While both buyers and sellers can benefit from insurance, some of the key advantages are as follows
Advantages to sellers
- To avoid or reduce the amount available in an escrow account
- Realize the proceeds of the sale immediately as there is no need to set aside a contingent fund
- Make a clean exit from the transaction
- Attract more bidders by providing a better warranty package
- Removes the ambiguity around the enforceability of the escrow account
Advantages to buyers include
- Enhance the indemnities (time period or amount) provided by the seller
- Help protect key relationship as the recourse can be from an insurance company and not the seller
- As recourse would be from an Insurance company, the company can rely on the credit rating of the insurer
- Address stakeholders’ concerns. In some cases, shareholders have accused management of inadequate care taken at the time of the transaction
It is thus important to consider Indemnities Insurance before walking into the negotiating room. In the probability of an adverse event, however low it may be, one must not be caught off guard. An Insurance policy can assist you against a possible catastrophic risk. As a seller, you may be able to sweeten the deal and thus extract maximum value from a transaction.
THIS ARTICLE IS WRITTEN BY MR. SAMIR THAKKER. HE IS ASSOCIATE VICE PRESIDENT WITH AON GLOBAL INSURANCE BROKERS PVT. LTD. DISCLAIMER: THE OPINIONS EXPRESSED IN THIS ARTICLE ARE THE AUTHOR’S OWN AND DO NOT NECESSARILY REFLECT THE VIEW OF THE COMPANY.