If you’re buying or selling a business, there’s a good chance you’ll come across warranty and indemnity insurance at some point in the process. It’s becoming a standard feature of many deals, yet it’s still not well understood by a lot of business owners – or even some of their advisers.
This article explains what it is, why it exists, and how it could affect your next transaction.
Why Warranties Matter in a Business Sale
When a business changes hands, the buyer naturally wants reassurance about what they’re getting. Is the financial information accurate? Are there any outstanding legal disputes? Are the contracts with key customers all in order?
To provide that reassurance, the seller gives a series of legally binding promises – known as warranties – as part of the sale agreement. These cover everything from the accuracy of the company’s accounts to the status of its employees, its tax position, and its contracts with customers and suppliers.
If any of those promises turn out to be untrue, the buyer has the right to bring a claim against the seller for any financial losses that result.
That’s straightforward enough in principle. The problem is that it can create real tension on both sides of a deal – and that’s where warranty and indemnity insurance comes in.
The Problem It Solves
Put yourself in the seller’s shoes. You’ve spent years building a business, you’ve agreed a sale price, and completion day finally arrives. But for months – sometimes years – after that, you’re still potentially on the hook if something unexpected surfaces. This might be a historic tax issue or a customer contract that wasn’t quite what it appeared, or perhaps an employment matter nobody knew about.
Even if you genuinely believed every warranty you gave was accurate, you may still face a claim. And that claim could come at a point when the sale proceeds have long since been reinvested or distributed.
For buyers, there’s a different concern: what if the seller simply can’t pay? If the business was sold by a private individual who has since retired, or a private equity fund that has wound down, pursuing a warranty claim may be more trouble than it’s worth – even if you’re clearly in the right.
Warranty and indemnity insurance (commonly referred to as W&I insurance) – addresses both of these problems by transferring the risk to an insurer instead.
How It Works
In most deals, it’s the buyer who takes out the policy, though both buyer and seller arrangements exist. Under a buyer-side policy, if a warranty turns out to be wrong and the buyer suffers a financial loss, they can claim directly against the insurer rather than going back to the seller.
This changes the dynamic of a deal significantly:
For sellers, it offers a genuinely clean exit. Once the deal completes, their liability is effectively capped, and in many cases removed entirely. Sale proceeds can be distributed without holding anything back in reserve. For business owners selling to retire or move on to something new, that certainty is invaluable.
For buyers, it provides the reassurance of knowing that a valid claim will actually be paid – by a rated insurer, not by a seller whose financial position may be uncertain. It also means that if a claim does arise, it doesn’t have to damage an ongoing relationship with the seller (for example, where the previous owner stays on as a director or consultant post-completion).
For competitive processes, W&I insurance can actually strengthen a buyer’s bid. Offering to take out a policy that removes or significantly reduces the seller’s liability can make an offer more attractive, even if it isn’t the highest on the table.
What Does It Cover?
A well-structured W&I policy will typically provide cover for the core warranties in the sale agreement – financial, legal, tax, employment, property and so on. The policy duration usually mirrors the timescales in the sale agreement itself, though extensions are possible.
That said, insurers do apply exclusions. Things that were known about before the deal completed won’t be covered – insurance is for the unexpected, not for issues that were visible during due diligence. Fraud by the insured party is never covered. Certain categories – environmental liabilities, pension deficits, and some tax matters – are either excluded as standard or may require separate specialist cover.
This is why the detail matters. A W&I policy needs to work in tandem with the sale agreement itself. If the two documents aren’t aligned, gaps can appear that leave neither party properly protected.
What Does It Cost?
The premium is typically calculated as a percentage of the policy limit – the maximum the insurer will pay out. That limit is usually somewhere between 10% and 30% of the deal value, though it can be higher in certain circumstances. Insurance premium tax applies on top.
Who pays the premium is a matter of negotiation. Sometimes the seller pays, on the basis that it’s their liability being transferred. Sometimes it’s split. In a competitive auction, buyers may absorb the cost themselves as part of making their bid more appealing.
The process of getting a policy in place typically takes around two weeks, though it can be faster where the timeline demands it. The key is to involve your advisers early – leaving it until the final few days of a deal creates unnecessary pressure.
Should This Be on Your Radar?
If you’re an owner-manager considering a sale, even if it’s not imminent, understanding how W&I insurance works will make you a better-informed seller when the time comes. If you’re considering an acquisition, it’s worth factoring into your planning from the outset rather than treating it as an afterthought.
W&I insurance isn’t a substitute for doing proper due diligence or taking good legal advice. It works best when the underlying transaction is well-structured and the sale agreement has been properly negotiated. But when those things are in place, it’s a genuinely useful tool that can make deals happen more smoothly – and give both sides far greater peace of mind.
Our corporate team advises businesses of all sizes on M&A transactions – from owner-managed company sales to more complex multi-party deals. We offer the expertise of a specialist corporate practice without the overhead of a large City firm. Please get in touch to discuss how we can help.
