This edition of JSA Live, where our partner Nandini Seth and principal associate Dhruv Malhotra, delve into how W&I insurance provides protection against breaches of warranties, ensuring cleaner exits for investors.
Transcript:
Hi everyone, I am Nandini Seth. Dhruv and I are here today to talk about warranty and indemnity insurance. Warranty and Indemnity Insurance has become a vital tool being used by private equity investors in facilitating their exit due to their limited inclination to provide extensive set of indemnities. Dhruv, would you like to tell us a little bit more about the usage of W&I insurance in transactions.
Warranty and Indemnity insurance provides cover against losses which may be suffered by either a buyer or a seller in a M&A transaction arising from a breach of the warranties, attributable to unknown events existing prior to the giving of such warranties. Like any other insurance product, a claim under a W&I insurance policy is subject to an ‘excess’ or ‘retention’ amount, a de-minimis threshold, and is subject to the CERTAIN terms and conditions (including, exclusions and the policy period) of the insurance policy. We are seeing investors with limited fund life, and even individual promoters opting for W&I insurance resulting in cleaner exits. However, these are some exclusions which one needs to keep in mind while planning an acquisition or an exit backed by W&I insurance.
These exclusions can be broadly categorised as following: (a) general exclusions; (b) sector specific and industry related exclusions; and (c) transaction related exclusions. Most insurers do not provide coverage against general exclusions.
The general exclusions prevalent in the Indian market are: (i) anti-bribery, anti-corruption, money laundering and sanctions related issues; (ii) fraud; (iii) forward looking statements made in the transaction documents; (iv) understamping of instruments; (v) underfunding of employee benefits; and (vi) pollution and contamination related issues. Other than these, secondary tax liabilities and cyber security related issues are also typically excluded from the scope of W&I insurance being provided in India.
Next are specific and transaction related exclusions which cover aspects like: (i) adequacy and conditions of assets; (ii) product liability/ recalls; (iii) title to property; (iv) transfer pricing; (v) impact of covid on the business; and (vi) issues identified in the DD reports and for which specific indemnities have been obtained. Entities and issues outside the transaction perimeter are also not covered as part of W&I insurance.
However, some of these specific sector and transaction related issues can be covered if the insurer is satisfied that a detailed due diligence has been undertaken around the specific issue. These exclusions can be kept in mind while structuring a nil recourse deal against an exiting seller.
Dhruv regularly advises clients on transactional and advisory matters. His primary experience areas are mergers and acquisitions, private equity, and cross border investments.