M&A Transaction Risks: A Practical Guide to Warranty & Indemnity Insurance

Transactional risk insurance, also known as Warranty & Indemnity Insurance (W&I Insurance), is a bespoke risk transfer product developed to cover transaction risks – potential losses arising from breaches of warranties given by sellers in mergers and acquisitions. In Asia, increasing numbers of buyers and sellers have come to recognize and appreciate the benefits offered by W&I insurance, which includes allowing sellers a clean exit, and also protecting the relationship between buyers and sellers post-transaction, by offering an alternative to hostile legal proceedings over warranty breaches.

Barely a few years ago, W&I insurance as a way of managing transaction risks was a foreign concept to Asian investors. Many buyers and sellers were even averse to the idea, due to the perceived high costs. Recently, however, it has come to be more widely-adopted, with its use often included in the drafting of Sales and Purchase Agreements (SPA) – testimony to its usefulness in M&A transactions. Between 2015 and 2018, the number of deals involving W&I insurance has almost tripled.

As users of this transactional risk solution become more familiar with its purpose, and the way it works, users’ queries on the product are becoming increasingly sophisticated. To address some of the common concerns posed by clients, Cheow Ai Ling and Gwendolyn Tan from Marsh’s Private Equity and M&A Services practice have teamed up with Chan Sing Yee and Jason Chua from WongPartnership LLP’s Corporate/Mergers & Acquisitions team, to share practical insights and tips on the use of W&I insurance, both from the broker’s as well as transactional lawyer’s perspectives.