Irish M&A W&I Insurance: Closing the Disclosure Trap

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Transatlantic risk management expectations of warranty and indemnity (W&I) insurance are increasingly shaping Irish deal-making.

For some time, insurers have offered US-style enhancements on Irish deals, allowing for the broadening of cover under an Irish W&I insurance policy. While these enhancements align cover more closely with that available under a US representations and warranties (R&W) insurance policy, they may still fall short of the comprehensive level of cover that US deal teams are familiar with.

More recently, however, a number of insurers have begun offering full US cover on Irish deals, providing the fully enhanced level of protection that is offered through a R&W insurance policy in the US.

US-style enhancements are individual, cover-broadening blot-ons to an Irish W&I policy, typically including non-disclosure of the data room, removal of materiality and knowledge qualifiers, introduction of an indemnity basis of loss, and (subjective) non-disclosure of due diligence reports. They typically add between 15% and 70% to the base premium, depending on the number of enhancements taken out.

Full US cover is a further upgraded form of W&I insurance cover that aims to close the disclosure trap entirely by placing baseline cover on a wholly objective footing, rather than on the constructive disclosure framework that underpins the Irish market standard. Full US cover generally includes all US-style enhancements plus (true) non-disclosure of due diligence reports, a more insured-friendly buyer knowledge construct, a nil de minimis, and a dropping retention. Premiums for full US cover will at least double the base premium, depending on the target’s risk profile and insurer appetite.

Addressing the disclosure trap

In a standard Irish M&A transaction, the buyer carries out due diligence on the target while the seller gives warranties and discloses against them. Disclosed matters commonly include:

The disclosure letter (or other disclosure mechanism)
The data room
Often, the buyer’s due diligence reports

Facts set out in these disclosed areas generally fall outside of warranty cover, and following that logic, Irish market W&I policies typically exclude them. This structure tends to work well for standard insured Irish deals, providing sellers with core W&I insurance policy outcomes, such as a clean exit, an alternate recourse path, lower caps, no escrows, and extended warranty survival.

However, this standard approach creates a “disclosure trap” — the more comprehensive the information available on the target, the larger the universe of excluded matters. For their part, insurers may decline a claim where a warranty breach relates to a disclosed matter, even if the disclosure was not specific and if it was buried in a data room or in a due diligence report. This disclosure trap can present itself relatively late in the transaction, when clients ask whether their W&I insurance policy would respond to a specific issue. This approach to disclosure can be particularly confusing for US buyers that are used to a more restricted approach.

US-style enhancements provide a la carte cover improvements

Where the Irish disclosure regime is unfamiliar to an inbound buyer, they will usually rely on local advisors to assist them in reaching a satisfactory negotiated position. Of assistance in these scenarios is that most W&I insurers are able to offer US-style enhancements that broaden W&I insurance cover on an Irish deal.

The effectiveness of these enhancements relies partly on drafting and transaction specifics but these bolt-ons can provide the insured with an enhanced W&I insurance policy that provides cover closer to that available in the US, narrowing the disclosure trap though not closing it entirely.

Full US cover provides objective disclosure and a clearer claims pathway

A handful of insurers now offer full US cover on Irish deals, closing the disclosure trap by shifting baseline cover onto a more objective footing, asking whether there is an actual breach and whether it is specifically excluded instead of relying on the standard constructive disclosure framework. By removing an insurer’s general disclosure defence to a claim, full US cover tends to provide a clearer and more binary claims pathway: if an issue is not specifically disclosed, then, it is usually covered. Full US cover typically includes all of the US-style enhancements with the following differences and additions:

True non-disclosure of due diligence reports for the purpose of the policy (without a requirement to confirm that the reports were read)
A more insured-friendly buyer knowledge construct
Nil de minimis
A dropping retention

Pricing for this level of cover tends to reflect the broadened exposure, the nil de minimis and the true non-disclosure of due diligence reports in particular being perceived by insurers as high risk. As such, securing full US cover usually requires at least a doubling of the base premium, depending on the transaction risk profile and insurer appetite.

Do you need a US-style deal to obtain full US cover?

When insurers began to offer full US cover, they initially required US-style transaction documentation. That expectation, however, is softening, and on most Irish M&A transactions it is now possible to obtain full US cover while retaining an Irish-style sale and purchase agreement and disclosure approach.

When is full US cover most useful?

Most insured buyers in Ireland seek market-standard W&I insurance cover and deploy selected US-style enhancements as desired. Full US cover, however, tends to be particularly valuable where:

An inbound sponsor or strategic buyer has a low tolerance for insurer constructive knowledge defences and expects US levels of insurance cover
The deal is highly competitive and the speed and friction reduction of full US cover is considered beneficial
The target risk profile is complex or the buyer is unfamiliar with the Irish market and wants a more comprehensive insurance backstop

Practical considerations for deal teams and legal counsel

The availability of full US cover is a welcome sign of market maturity and parties to a transaction should consider how best to take advantage of the options. In particular:

Deal teams should have an idea of what they want to achieve with W&I insurance beyond facilitating negotiations and generally reducing transaction risk exposure. If the objective is broader cover and securing financing support, full US cover may be a better fit than if process requirements are the main insurance driver.
Legal teams and their clients should decide early on which tier of cover to seek. Many US-style enhancements can be selected relatively late in the underwriting process but insurers typically want to know at the outset if full US cover will be taken out.

Full US cover offers a practical way for buyers to reduce disclosure-related uncertainty without altering the mechanics of an Irish deal. Deal teams and deal counsel should evaluate whether the incremental cost increases can assist in delivering on a transaction’s objectives and, if so, engage Marsh Risk’s team of specialists early to help secure the desired tier of cover.

Article

Avoiding the disclosure trap in Irish mergers and acquisitions (M&A)

Transatlantic risk management expectations of warranty and indemnity (W&I) insurance are increasingly shaping Irish deal-making.

Addressing the disclosure trap

US-style enhancements provide a la carte cover improvements

Full US cover provides objective disclosure and a clearer claims pathway

Do you need a US-style deal to obtain full US cover?

When is full US cover most useful?

Practical considerations for deal teams and legal counsel

Our people

John Small

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Avoiding the disclosure trap in Irish mergers and acquisitions (M&A)

Transatlantic risk management expectations of warranty and indemnity (W&I) insurance are increasingly shaping Irish deal-making.

Addressing the disclosure trap

US-style enhancements provide a la carte cover improvements

Full US cover provides objective disclosure and a clearer claims pathway

Do you need a US-style deal to obtain full US cover?

When is full US cover most useful?

Practical considerations for deal teams and legal counsel

W&I solutions

Our people

John Small

Related insights

Preparing for an exit through a strong people strategy

Smart strategies to mitigate risk in a private equity exit

What the proposed section 45Z rules mean for clean fuels

Is your portfolio truly exit-ready?