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The purpose of warranties and indemnities insurance is that the
insurance company assumes the seller’s liability for damages in
case one of the seller’s warranties has been breached. The
basic requirement for getting an insurance is that the buyer
conducts a careful due diligence review of the object of
transaction because the insurance only covers unknown risks for
which the seller has given warranties in the sale and purchase
agreement. It is therefore important to bear in mind that the
insurance does not cover findings of the due diligence review, but
instead the parties have to agree how liability for the observed
findings is allocated.
In our previous blog, we wrote about how
. We discussed briefly what
W&I insurances are about and for what kind of transactions they
are suitable. In addition, we shared our best practical tips for
taking out W&I insurance. In this blog, we will review how the
insurance affects the contents of the sale and purchase agreement
and the buyer’s due diligence review.
W&I INSURANCE AFFECTS THE CONTENTS OF SALE AND PURCHASE
AGREEMENTS
A conventional sale and purchase agreement includes certain
seller’s warranties for the object of sale and purchase that
are agreed between the parties. The purpose of a W&I insurance
is that the insurance company assumes the seller’s liability
for damages in the event that one of the seller’s warranties
has been breached. Even though the liability for damages in an
insured sale shifts to the insurance company, it is good to keep in
mind that the seller’s warranties must be as valid in an
insured sale as in a sale without a W&I insurance. From the
seller’s perspective, it is a good idea to agree in the sale
and purchase agreement that the buyer can only make claims to the
insurer and not to any extent to the seller.
In the terms and conditions of a W&I insurance, the insurer
can exclude some of the seller’s warranties so that their
breach will not be compensated from the W&I insurance. The
potential damages caused by the seller’s breach of such
warranty will be borne by the buyer, unless the parties have agreed
in the sale and purchase agreement that the seller is liable for
such breaches. The seller may, however, become liable for the
breaches of the warranties if it has caused them wilfully or
through gross negligence. It should be kept in mind that the
W&I insurer is entitled to claim compensation from the seller
for the damage it has compensated if the damage is caused by the
seller’s wilful or grossly negligent breach of the warranty.
Usually the terms and conditions of the insurance also exclude the
seller’s warranties relating to the pollution of soil or
groundwater and taxation of transfer pricing. However, there are
insurances on the market that target the risks relating
specifically to these.
If the parties agree on separate signing of the sale and
purchase agreement and completion of the sale, a separate new
breach cover must be taken to cover breaches of the seller’s
warranties between the signing and the completion if such coverage
is required. In the sale and purchase agreement, the parties can
also agree how liability for these breaches of warranties is
allocated between the parties. If the time between the signing and
the implementation is long (as is often the case in forward
purchases), it should be ensured whether the insurer is willing to
provide insurance cover for such a long period of time.
THE INSURER INVESTIGATES THE BUYER’S DUE DILIGENCE
REVIEW
A basic requirement for getting an insurance is that the buyer
conducts a careful due diligence review of the object of sale and
purchase. It is the buyer’s duty to conduct a comprehensive
legal, commercial, technical, environmental and tax due diligence
review. As part of the preparations of the insurance policy, the
insurer also conducts its own review based on the buyer’s
reports and the information submitted by the seller for the due
diligence process. The insurer insures the seller’s warranties
of the object of sale and purchase only to the extent the matters
covered by the warranties have been reviewed as part of the
buyer’s due diligence review.
The W&I insurance only covers unknown risks for which the
seller gives warranties in the sale and purchase agreement. It is
therefore important to bear in mind that the insurance does not
cover findings of the due diligence review, but instead the parties
have to agree how liability for the known findings is allocated. In
such a situation, the buyer can seek to include in the sale and
purchase agreement the seller’s specific undertakings on how
the seller ensures the implementation of measures or bears the
costs thereof. One solution could also be a reduction of the
purchase price by a sum corresponding to the finding.
IT IS POSSIBLE TO AGREE ON THE COSTS OF THE W&I
INSURANCE
The parties can agree how the insurance costs are allocated
between the parties. Often the premise is that the buyer bears the
insurance premium. If the seller will be dissolved or ceases to
exist after the completion of the sale, a W&I insurance may be
a requirement for the sale. In such a case, the parties may agree
to allocate the costs between the seller and the buyer.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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