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Warranty and indemnity insurance
A W&I claim is made when the buyer finds that a warranty in the sale agreement was untrue and it has suffered loss as a result. The insurer pays that loss above the retention and up to the limit, usually without the buyer having to sue the seller.
Part of: Warranty and indemnity insurance explained
In short
To claim on a buy-side W&I policy, the buyer notifies the insurer within the policy period, shows that a warranty was breached and proves the loss that breach caused. Loss is usually measured as contract damages, often by comparing the value of what was bought with its value had the warranty been true. Small claims below the de minimis are commonly ignored, and the buyer bears the retention before the insurer pays. Insurers typically give up their right to pursue the seller except for fraud. The insurer must pay sums due within a reasonable time under the Insurance Act 2015. Each policy's terms decide the detail.
A successful claim usually needs four things:
Claims often surface during the buyer’s first audit, a tax enquiry, a customer dispute or an employment claim. Where the policy covers a synthetic tax deed or specific indemnities, the claim is under those terms instead of a warranty, and breach and knowledge may work differently. The common exclusions are worth checking before notifying.
Notify the insurer as soon as the buyer becomes aware of facts that may give rise to a claim, in the form the policy requires. W&I policies commonly set out what the notice must contain, such as the warranty concerned, the facts and an estimate of loss, and may require the insurer’s consent before the buyer settles with a third party or admits liability.
If the policy sits alongside a seller’s contractual liability, the SPA may have its own notice provisions with strict time limits and content requirements. Follow both. Late or incomplete notice is a common reason for a dispute, whichever contract it falls under. Our page on first notification of loss covers notification in general.
Loss for breach of warranty is generally assessed as damages for breach of contract: the amount that puts the buyer in the position it would have been in had the warranty been true. In a share sale this is often argued as the difference between the value of the shares as warranted and their actual value. Where the price was set on a multiple of earnings, buyers sometimes argue that an overstatement of earnings should be multiplied too. Whether that succeeds depends on the evidence and on how the SPA and the policy define loss.
W&I policies commonly cover the loss defined in the SPA, subject to their own definition. Some policies remove the effect of materiality qualifiers in the warranties for the purpose of calculating loss, known as a materiality scrape. Others limit consequential loss or loss calculated on a multiple. These points are negotiated before the policy is bound, not at claim stage, so read them early.
| Term | What it does |
|---|---|
| De minimis | Individual claims below a set amount are ignored, and do not count towards the retention |
| Retention | The total loss the buyer bears before the insurer pays, sometimes reduced after a set period |
| Limit | The most the insurer will pay in total, often a proportion of the deal value rather than the full price |
| Policy period | The time within which a claim must be notified, often longer for tax and fundamental warranties |
Some retentions are split between the buyer and a small seller cap. See deductible and heads of loss for the general concepts.
Once an insurer pays a claim it normally steps into the insured’s shoes and can pursue anyone liable for the loss. This is subrogation. On a buy-side W&I policy, insurers commonly agree to waive subrogation against the sellers except where the seller committed fraud. That is what gives sellers a cleaner exit; see buy-side vs sell-side W&I.
In practice that means a seller who disclosed honestly is usually not pursued, even if a warranty proves untrue. A seller who knowingly concealed a problem can expect the insurer to look to recover. The SPA and the policy should say the same thing on this point, and lawyers on both sides commonly check that they do.
Three sets of time limits can apply. The policy period is set in the W&I policy, commonly a few years for general warranties and longer for tax and fundamental ones. The SPA claims period limits claims against the seller and is usually shorter. Behind both sits the statutory limit: under section 5 of the Limitation Act 1980, an action on a simple contract must be brought within six years of the date the cause of action accrued, and under section 8 twelve years for a contract made by deed.
The insurer has duties too. Under section 13A of the Insurance Act 2015 it is an implied term of every insurance contract entered into on or after 4 May 2017, when the section came into force, that the insurer will pay sums due within a reasonable time, which includes a reasonable time to investigate and assess the claim. See late payment of claims under the Act.
The insured has obligations as well. If it makes a fraudulent claim, section 12 says the insurer is not liable to pay it, can recover sums already paid and may treat the contract as terminated from the time of the fraudulent act.
Illustrative: nine months after buying a software company, the buyer discovers that several customer contracts had been on discounted terms not shown in the data room, contrary to the warranty on material contracts. Recurring revenue is lower than warranted. The buyer notifies the insurer, which appoints lawyers and forensic accountants to review the claim. The parties argue over whether the lost revenue should be multiplied in line with the price; the policy definition of loss settles the point. The insurer pays the agreed loss above the retention and does not pursue the sellers, because there is no evidence they knew.
Apex arranges warranty and indemnity (W&I) and M&A insurance. A broker reads each enquiry and comes back with options; there is no fee for a quote, and cover is subject to the insurer’s acceptance and the policy terms. To quote we need the target’s business activities, turnover, location and claims history, plus the deal value, the draft SPA, the due diligence reports and the disclosure letter. See warranty and indemnity insurance explained and due diligence and W&I underwriting.
Notify the insurer as soon as you become aware of facts that might give rise to a claim, following the notice terms in the policy. Give details of the warranty concerned, the facts and an estimate of loss. Do not settle with third parties or admit liability without the insurer's consent if the policy requires it.
Usually not, unless the seller committed fraud. On a buy-side policy insurers commonly waive their subrogation rights against the sellers except for fraud. A seller who disclosed honestly is normally protected; one who knowingly concealed a problem may be pursued for what the insurer has paid.
It is the total amount of loss the buyer must bear before the insurer pays, similar to an excess. Individual claims below the de minimis usually do not count towards it. Some policies reduce the retention after a set period, and part of it is sometimes covered by a small seller cap in the SPA.
Generally as contract damages: what puts the buyer in the position it would have been in had the warranty been true. In share deals that is often argued as the difference between warranted and actual value. The policy's definition of loss, including any limits on multiplied or consequential loss, decides what is recoverable.
Within the policy period, which is commonly a few years for general warranties and longer for tax and fundamental warranties. The SPA may set a shorter period for claims against the seller. The statutory limit for contract claims is six years, or twelve for a deed, but contractual periods usually apply first.
Tell us what your business does, your turnover and any claims. A broker reads every enquiry and comes back with options. No fee for a quote. Or call 0117 325 0027.
Start a commercial enquiry Request a callbackApex Insurance Brokers Limited is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales, company number 07014570. This page is general information, not advice on your individual circumstances, and it does not guarantee that cover will be available or on what terms.
