In European M&A transactions, Warranty & Indemnity insurance (W&I insurance) has stopped being an exotic tool used primarily in private equity deals and has increasingly become a standard risk allocation mechanism in M&A transactions. Today, W&I insurance in M&A is no longer limited to large-cap transactions and is also widely used in the SME market.
Note: if you are new to W&I insurance, you can read our introductory primer here before continuing.
Founders selling their second or third company are usually already familiar with it. First-time sellers often discover W&I insurance halfway through the process, when counsel introduces it into a draft SPA as a way to overcome difficult negotiations regarding damages definitions, indemnities and issues arising from the due diligence process. When this happens, the negotiation framework everyone initially had in mind changes materially and often quite suddenly.
This series is written for that audience: founders, entrepreneurs and investors involved in M&A transactions. We do not intend to walk through policy clauses or technical insurance mechanisms (that is what brokers and transaction counsel are for), but rather to explain what actually changes in a transaction once W&I insurance enters the picture and how to use it strategically instead of as a last-minute patch.
The first key question, therefore, is timing: W&I, yes — but when?
As with almost everything in a deal process: the earlier, the smoother the transaction
In a typical European M&A process, buyers submit non-binding offers, one bidder is selected, exclusivity is granted and, afterwards, the due diligence and SPA negotiations begin.
It is not unusual for W&I insurance to be introduced only once discussions around indemnities, liability caps or liability structures start becoming difficult. In those circumstances, insurance can certainly help unblock the conversation.
However, it does so within a framework that has already been built on different assumptions — for example, the assumption that the seller will stand behind the warranties to a meaningful extent. Expectations on both sides are already anchored, and the buyer’s offer may already reflect anticipated recourse against the seller. The seller, in turn, may already have accepted a certain risk allocation as part of the negotiation.
By contrast, introducing the intention to structure the transaction with W&I insurance at the LOI stage (Letter of Intent) costs virtually nothing and completely changes the dynamics of the negotiations that follow.
What changes from day one
First, the pricing discussion becomes significantly cleaner and more transparent. If both parties understand from the outset that a buyer-side policy will be used, the seller can present the transaction as a clean exit (or, more precisely in many cases, as an exit with controlled residual risk). The buyer, in turn, can structure its bid knowing that recourse for breaches of warranties will primarily sit with an insurer rather than with a group of founders who are about to reinvest in the business or retire.
Second, due diligence is usually approached with a broader audience in mind. Insurers expect a rigorous, well-documented and properly scoped diligence exercise. When the buyer’s team knows from the beginning that an underwriter will later review the due diligence reports, the work product is shaped accordingly: vendor due diligence reports are commissioned where appropriate, gaps are identified and addressed early and the entire diligence narrative is built to satisfy both the buyer and the future insurer.
Third, the SPA is drafted within a different framework. Warranties, disclosure standards, loss definitions and indemnification structures stop being purely bilateral constructs. Instead, they are assessed in light of what is likely to be acceptable to an insurer based on prevailing market standards in M&A transactions.
Addressing these issues from the outset with W&I insurance in mind is generally far more efficient than revisiting them later in the process. In addition, insurers and brokers already know what is considered acceptable under market practice in each jurisdiction, which usually results in a smoother and faster process overall.
Finally — and probably most importantly from the seller’s perspective — the negotiation framework is established early with respect to some of the most critical aspects of the transaction.
If the LOI already states that general warranty recourse will primarily sit with the insurance policy (subject, as usual, to fundamental warranties and identified risks), the discussion around liability becomes largely framed before the detailed drafting process even starts. By that point, much of the underlying logic of the deal has already been agreed.
From day one, but how?
Sellers sometimes worry that introducing W&I insurance too early in the negotiation may be perceived as a concession or may lock them into a predefined structure before they fully understand the transaction. In practice, however, the LOI does not need to be overly prescriptive in order to achieve the desired outcome.
In most cases, a relatively concise clause is sufficient, provided it is drafted with the appropriate level of precision. It is not simply a matter of stating that the transaction is expected to be backed by W&I insurance; it is essential to include the right “magic language” to ensure that the risk allocation agreed at the LOI stage effectively carries through to the SPA.
In particular, the LOI should make clear that sole recourse for breaches of warranties will sit with a buyer-side W&I policy (on a nil-recourse basis), while carving out fundamental warranties and specifically identified risks where appropriate — although coverage for fundamental warranties has become increasingly common.
Without that clarity, there is a genuine risk that, despite the existence of insurance, the buyer may attempt to introduce additional or layered recourse mechanisms at SPA stage; for example, structures where the policy responds first and residual exposure is then shifted back onto the sellers.
If properly drafted and agreed at the LOI stage, this mechanism produces several simultaneous effects: it anchors the transaction as a clean exit deal (a concept we will explore further in Part II); it signals to bidders that the policy cost forms part of the deal economics; and, above all, it preserves flexibility regarding those aspects that genuinely need to be negotiated later (for example: caps, specific indemnities, retentions or interim period mechanics).
With whom?
One practical consequence of introducing W&I insurance early is that the broker should become involved in parallel with the SPA drafting process, not afterwards.
A good broker will run a market sounding exercise, obtain non-binding indications (NBIs) from several insurers and provide the buyer with a realistic view of what the coverage will look like, what the premium and retention levels will be and which business areas are likely to be subject to specific exclusions.
That information, obtained as early as possible after signing the term sheet, is substantially more valuable — both for the deal dynamics and the final outcome — than receiving the same information two weeks before signing, when the transaction is already largely on track.
Conclusion
W&I insurance is a tool and, like any tool, it works best when it is used from the beginning rather than once the work is almost finished. For founders preparing to sell their company, the practical takeaway is straightforward: assume from the outset that the transaction will be insured, structure the process accordingly and build that framework directly into the LOI. Everything that follows — due diligence, drafting, negotiation and pricing — becomes easier and more favourable when the structure has already been agreed from day one.
At Across Legal, we understand that every transaction is unique. Want to make sure there are no surprises after closing your deal? Contact our experts for a personalised consultation and discover how W&I insurance can protect you and your business in your next M&A transaction.
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