Transactional risk insurance has become a notable feature of private mergers and acquisitions, replacing traditional seller indemnities with specialised policies: it provides sellers with a clean exit and buyers with a competitive edge.
As an increasingly frequent topic in risk-allocation discussions it can also help parties resolve difficult points and create deal momentum.
But insurance is not a panacea. Its value will depend on the transaction, categories of risk and whether policy terms match each party’s commercial objectives.
Used judiciously it can unlock a deal; used unwisely it can add to cost and complexity without resolving the problem.
Warranty and indemnity insurance
There are several types of M&A risk insurance. The most common is warranty and indemnity (W&I) insurance, which covers financial losses if a seller’s representations or warranties relating to a business prove inaccurate.
These losses invariably originate from breaches of the seller’s warranties and indemnities as outlined in the acquisition agreement.
Typically, W&I insurance covers unknown risks rather than issues that have been identified through due diligence or disclosure.
Written on either a buy-side or sell-side basis, it is predominantly used in private M&A, although it can also be deployed in public M&A if warranties are given by the target company or its shareholders.
Buy and sell-side policies
Buy-side policies remain the most prevalent form of W&I insurance in the UK market.
They indemnify the buyer in respect of losses that arise from breaches of warranties outlined in the acquisition agreement.
The buyer can claim directly from the insurer without having to claim against the seller, which facilitates a cleaner exit.
Similarly, sell-side policies indemnify the seller for losses that result from claims made by the buyer for breaches of warranties outlined in the acquisition agreement.
Less common than buy-side cover, sell-side policies can still be useful in the right transaction, such as some founder-led sales and seller-driven processes.
Stapled policies
Used primarily in auction and other competitive sale processes, a stapled W&I policy (also known as a sell-buy flip) involves the seller initiating the insurance and presenting the buyer with a ready-made buy-side policy to insure warranties in the acquisition document.
It enables the seller to offer potential buyers an insurance solution that has already been fully or partially negotiated.
Depending on how far it has progressed, the solution can be described as soft stapled or hard stapled.
The seller begins the soft-stapled insurance process, while the buyer retains meaningful input on insurer selection, policy terms and underwriting.
By contrast, the seller presents a mostly fixed insurance solution under a hard-stapled policy, which leaves limited scope for the buyer to renegotiate terms.
Synthetic policies
Synthetic insurance differs from traditional W&I insurance in that warranties are negotiated directly between buyers and insurers rather than with sellers.
In practice, the seller provides either no or minimal warranties in the transaction documents.
Instead, the policy creates and insures warranties outside the acquisition agreement.
Commonly, this structure is preferred where sellers either will not, or cannot, provide a full warranty package — most often in distressed deals, minority exits and certain types of structured or asset-heavy transactions.
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A fully synthetic W&I policy excludes the sellers from warranty negotiations entirely, although they must still engage comprehensively with the due diligence process.
A key distinction exists between stapled and synthetic W&I policies: synthetic policies determine where the warranties sit (in the policy), while stapled policies determine who controls the process (ie the sellers).
Standardised policies
Standardised W&I policies are off-the-shelf insurance products that use fixed, non-negotiable wording and a standardised underwriting process.
Streamlined and pre-packaged, they are designed to provide cost-effective coverage for smaller or less complex M&A deals where W&I insurance is harder to deploy.
Standardised policies can help facilitate lower-mid-market transactions, typically less than £20mn enterprise value (and often below £10mn), where bespoke and highly negotiated underwriting would be disproportionately expensive and therefore hard to justify.
Contingent liability insurance
Also known as contingent risk insurance, contingent liability insurance can be used as a standalone solution independent of any transaction.
It transfers the financial risk of specific legal or regulatory exposure from the parties to an insurer.
These risks frequently emerge during the due diligence process or are the subject of a particular indemnity or commercial concern, such as ongoing litigation.
Tax liability insurance
Tax liability insurance can be used before, during or after an M&A transaction, or be placed on a standalone basis outside a transaction.
Whereas unknown tax liabilities can be covered by W&I insurance, tax liability insurance transfers a known but uncertain tax liability to an insurer: a tax issue can be ringfenced, while the extent to which that issue needs to be negotiated in the acquisition agreement can be decreased.
Put simply, it can reduce the need for a specific tax indemnity from the seller.
Environmental liability insurance
Also known as pollution legal liability insurance or environmental impairment liability insurance, environmental liability insurance covers pollution, environmental damage and related claims arising from gradual conditions or sudden accidental events.
Usually written on a standalone basis and independent of the terms of the acquisition agreement, it can afford wider protection than the limited cover for environmental liabilities provided by a traditional W&I policy, although this will depend on the policy terms.
Title insurance
In M&A, title insurance protects buyers, sellers and lenders against financial loss that arises from legal disputes, undiscovered defects or challenges concerning the ownership of shares in an acquired company or its real estate assets.
A title insurance policy can be placed alongside W&I insurance or on a standalone basis.
Traditionally associated with real estate transactions, its use in M&A deals where parties want to transfer identified title risks to a third-party insurer has increased.
As these products become more familiar in the private M&A market, parties are increasingly using insurance both as protection and as a tool to facilitate execution.
Ideally, it should be integral to the transaction strategy from the outset, rather than emerging as a late-stage workaround.
Rory Wilson is a partner and Marie Schwab is a senior paralegal at Hunters Law
