How much will a W&l policy cost and what are the influencing factors?
W&l insurance is paid via a premium, payable in full when the policy is taken out. Typically a premium is calculated as a percentage of the total limit of insurance coverage (known as the ‘rate on-line’) ranging from 1-3% (but the average of buy-side premium has recently tended to be around 1.3% including insurer’s and brokers’ costs). Factors which may affect the level of premium include: amount of excess, limitations on the warranties in the SPA, industry sector, geographic risk (for example Australia attracts lower rates than the US), identity and credit worthiness of the parties to the transaction, complexity of the transaction and competence of the transaction advisers.
Can a policy be bought after the transaction has completed?
Yes, although a policy is typically bought prior to completion to ensure that the risk is covered as soon as the transaction has occurred, a policy can be bought after completion. This is viewed favourably by insurers (assuming the risk is unknown and insurance is not being sought for something that has been discovered) as it indicates that the parties were happy to complete without the insurance ‘safety net’ and thus suggests that a full due diligence has taken place.
Is it possible to extend the coverage period?
Yes, a main advantage of W&l insurance is that it can extend the warranty coverage period past the limitations set in the SPA. This may provide additional comfort to a buyer that is unable to negotiate a longer period of warranty coverage against the seller. Typically, insurers will be willing to provide coverage on fundamental warranties for a period of 7 years, general warranties between 2-5 years and tax warranties to the statutory time limit for such claims.
How long does the process take?
Insurers will work to tight deadlines in order to minimise the commercial impact of the transaction; however, from initial indicative offering to policy inception a minimum period of around 7 days is required and typically will be 2 to 3 weeks.
What are the likely exceptions that will be excluded from policies?
Insurers will not cover all of the warranties in the SPA (note, different insurers will exclude different risks). Typical warranties that insurers may not cover include: bribery and corruption, certain environmental issues, certain regulatory issues and financial warranties (including ‘leakage’) and pensions underfunding. In addition, the policy will not provide coverage for certain tax risks such as those resulting from transfer pricing arrangements.
If insurers are unwilling provide coverage it may, however, be possible to purchase additional specialist cover for such warranties.