Warranty & Indemnity

Transcription

1 Warranty & Indemnity W&I Insurance Warranty & Indemnity ( W&I ) Insurance covers breaches for unknown risks in representations and warranties given in the sale of a business. The policy, whether seller-side or buyer-side, indemnifies the insured for losses arising from a breach of warranty or tax deed/covenant in a Sale and Purchase Agreement ( SPA ). Sellers can place cover to prevent sale proceeds being tied-up in escrow accounts and other legacy issues. Buyers can be certain the warranties they have been given have real value. This includes situations where the seller would be unable to pay the warranty claim, such as limited liability companies. a creative and dynamic approach to risk solutions...

2 Policy Features: Excess/Deductible: The portion of the loss that is not covered by the Policy. The excess is on an aggregate basis each and every valid claim shall erode the policy limit. The excess usually stands at 1% of the transaction value but can drop to 0.5% or even lower in some cases; Policy Limit: Normally around 10-50% of the transaction value depending on the underlying warranty caps and desired level of risk transfer; Premium: typical premium rates are circa 1% to 1.5% of the Policy Limit for Western European Deals; 1.5-3% for Central & Eastern European, Asian and US deals; 3-4% for particularly high risk jurisdictions. The Premium is a one-off payment for the entire Policy Period; Policy Period: the duration of cover can match or extend beyond the survival periods in the Acquisition Agreement with a maximum Policy Period of 7 years.

3 Benefits for the buyer If there is a breach of a warranty by the Seller the Buyer deals directly with A-rated insurers instead of subrogating against the seller. With a W&I policy, there is no need to involve the seller; Seller fraud is covered; Opportunity to extend survival periods and increase the warranty cap; Enables a deal to move forward, if the seller and buyer cannot agree on certain warranties; Supplements protection for breaches of warranties both in terms of value and certainty of payment; Extends the duration of warranties, affording buyers additional time to detect and report problems that may exist with the acquired business; Distinguishes a bid in a competitive auction by negotiating more limited recourse from the sellers by supplementing the contractual recourse with insurance; Protects relationships with sellers who may become the buyers key employees or commercial business partners after the transaction.

4 Benefits for the seller: Enables a clean exit by leaving the deal with a liability limited to between NIL 1% (of the Purchase Price) instead of being liable for a warranty cap of 10-50% of the Purchase Price; Allows the Seller to distribute monies to its investors e.g. by avoiding escrows, a bank guarantee or building a provision in the accounts; Enables a deal to move forward, if the seller and buyer cannot agree on certain warranties; Expedites a sale and can potentially increase the purchase price; Reduces the risk of contingent liabilities arising from future claims; Protects passive sellers who have not controlled or been actively involved in the `management of the target business from unintentional nondisclosure or breaches of the SPA.

5 Required Documentation: Information required to quote on a non-binding indication basis; Current draft of the SPA/Acquisition Agreement including the disclosure letter (if available); Information Memorandum of the target company; Latest audited accounts of the target company; Any vendor due diligence (if available). Once an Insurer has been selected, the underwriting process begins, whereby the following will be required: Access to the data room; Underwriting conference call this is a call between the Insurer and seller s deal team and typically lasts 1.5 hours. The underwriting call usually takes place 3-4 days following the instructions to proceed; Insurers will typically require 5 to 7 business days to complete their underwriting and finalising the placement when given the instructions to proceed; An undertaking for costs will need to be signed to allow the insurer to conduct their due diligence.

6 Other M&A Products We can also provide cover for known/discovered risks in the context of an M&A transaction: Tax Opinion Policy This policy covers a specific tax risk which was discovered during the due diligence process. If the outcome of this specific tax risk is most likely in the favour of the insured but, because of a tight time scale of the ongoing M&A process, it becomes an issue, a policy can be put in place to overcome the potential issue. Litigation Buy-out This policy covers the risk resulting from an ongoing litigation or a potential litigation which is about to start. The outcome of the litigation needs to be most likely in the favour of the insured. Litigation can take years to resolve through the courts. This policy helps to overcome the time issue and enables the M&A process to move forward. Premium These policies are tailor-made and more work-intensive as such, they are priced at between 5-10% of the acquired limit.

7 The Warranty & Indemnity Process Actions Taken Broker conducts initial review of the Deal Documentation Required Draft SPA Details of the Deal STAGE 1 Broker Review (1 2 days) Broker will take case to Insurers Insurer will provide a non-binding indication STAGE 2 Submission to Insurers (2 3 days) Draft SPA Latest set of audited accounts and/or the information memorandum N/A STAGE 3 Initial Indication (1 day) Initial review of documents by Insurer and Underwriters Meetings and discussions with relevant team members Final amendments to policy and agreement to place on risk STAGE 4 Underwriting Due Diligence (3 6 days) STAGE 5 Completion and/or Binding of Cover (2 4 days) Draft SPA All Due Diligence undertaken (data room) Disclosure Letter Signed commitment to insurers fees Final SPA and disclosure letter Final DD Reports Underwriting call No claims declaration signed

8 Who are Pii? At Pii we have developed an excellent reputation as property insurance specialists, working closely with some of the leading insurers to provide a wide range of policies relating to the management, procurement or disposal of property assets, ensuring that no stone is unturned and that all areas of exposure are addressed. Our industry has for some time lacked creative and dynamic thinking in terms of risk transfer and risk solutions. Focus has instead been on growth via acquisition. Our growth is delivered from embracing innovation for alternative risk transfer programmes. By understanding the Real Estate sector we are able to provide solutions for those difficult property risks that often prove problematic. Our outstanding track record is built on generating trust and creating the right environment for doing business. We trade using a carefully chosen set of core values and believe in constant dialogue with our clients, insurers and employees to ascertain their needs. We are committed to being the best, with the strength of Pii resting firmly in our people and their abilities. a creative and dynamic approach to risk solutions... SANDY MOONEEAPEN Director sandym@piiuk.com Office Mobile Web ADAM KEITH LLB (Hons) Manager Transactional Liability akeith@piiuk.com Office Mobile Web London Office 1/1A Telegraph Street, London EC2R 7AR +44 (0) Hampshire Office 7 Highview, Bordon, Hampshire GU35 0AX +44 (0) Web Property Insurance Initiatives Limited Registered In England: Registered Office: 7 Highview, Bordon, Hampshire GU35 0AX Property Insurance Initiatives Limited is authorised and regulated by the Financial Conduct Authority No: