The policy is usually taken out by the buyer (buy-side). If it emerges after closing that a warranty was untrue, the insurer pays up to the limit of cover. The basis is proper due diligence. Risks known to the buyer are generally excluded, as are, for example, purchase price adjustments.
For sellers, W&I insurance is attractive because it greatly limits their own liability. This can go as far as a so-called clean exit: liability for warranties is reduced to a symbolic amount, and there is no escrow retention. The purchase price is therefore paid in full. This is an important point, especially in successions where the owner wants to step back.
Insurers require a minimum premium, which can be disproportionately expensive for small transactions. In Germany, insurance tax of 19% is charged on the premium (§ 6 VersStG). Who bears the premium is a matter for negotiation; in an auction process it is usually the buyer.
Example
Hypothetical example: Purchase price €20 million, limit of cover €2 million. At an assumed premium of 1.5% of the cover, that is €30,000 plus 19% insurance tax, i.e. €35,700. The seller's liability for warranties is reduced to €1.
With vs. without W&I insurance
| Feature | With W&I | Without W&I |
|---|---|---|
| Claims made against | Insurer | Seller |
| Escrow retention | Usually not required | Often required |
| Costs | Premium plus tax | No premium |
| Seller's liability | Greatly limited | Up to the agreed cap |
Sources
- Die W&I-Versicherung als Auffangnetz im Small- und Mid-Cap-Bereich, CMS Hasche Sigle
- § 6 VersStG Steuersatz, Bundesministerium der Justiz