In business sales, the buyer takes on a significant risk: that there may be hidden liabilities or breaches of the warranties given by the seller. To cover this risk and make the process more secure, an increasingly popular tool has become established in Spain and Europe: warranty and indemnity (W&I) insurance.
This insurance transfers part of the parties' liability to an insurance company, which speeds up the negotiation and provides security for both sides.
What is warranty and indemnity (W&I) insurance?
W&I insurance is a policy that covers the buyer or the seller against financial losses arising from errors or breaches in the representations and warranties included in the purchase agreement.
- Buyer-side policy: protects the buyer, since the insurer directly indemnifies the losses if any warranty turns out to be inaccurate.
- Seller-side policy: protects the seller by reimbursing any payments they have to make to the buyer in the event of a claim.
In practice, the most common policy in Spain is the buyer-side one, because it gives the buyer direct coverage and strengthens their security in the transaction.
What does W&I insurance cover?
Although the exact scope depends on the policy and the insurer, W&I insurance generally covers:
- Errors in the financial statements presented during the sale process.
- Tax contingencies not detected during due diligence.
- Hidden employment or commercial litigation.
- Regulatory breaches in corporate or administrative matters.
- Issues related to intellectual or industrial property (trademarks, patents, software).
Common exclusions
It's important to keep in mind that a W&I policy doesn't cover every risk. The most common exclusions are:
- Matters already known or disclosed in due diligence.
- Fraud or willful misconduct by the seller.
- Specific environmental risks.
- Administrative fines already notified.
- Undocumented pension plans or future employment commitments (for example, unregistered pension plans).
Advantages of W&I in M&A deals
For the buyer
- Greater protection against hidden liabilities.
- Assurance that the indemnity will be paid by a solvent insurer.
- It makes it easier for the seller to accept lower liability caps.
For the seller
- It reduces future liability after the sale.
- It allows the seller to receive the full transaction price sooner.
- It avoids personal conflicts or direct litigation with the buyer.
For the deal
- It speeds up the negotiation: fewer disputes over the scope of the warranties.
- It makes closing easier in deals with multiple sellers (investment funds, family offices).
Drawbacks and limitations
- Additional cost: premiums typically range from 1% to 3% of the insured amount.
- Underwriting process: it requires a detailed review by the insurer.
- Limited coverage: it's no substitute for thorough due diligence.
When it makes sense to take out W&I insurance
- In large deals, where the financial risk is high.
- In processes involving investment funds that require clear liability limits.
- In cross-border transactions, where there's less trust between the parties.
- When the seller is a fund or family group that wants a “clean” exit.
Conclusion
Warranty and indemnity (W&I) insurance is a key tool in M&A.
It brings security, trust, and speed to deals, protecting both buyers and sellers against unforeseen contingencies.
Although it involves an additional cost, its benefits in terms of risk reduction and smoother agreements make it an increasingly widespread practice in Spain and Europe.
