Warranty and indemnity (W&I) insurance explained

Reviewed by Matthew Bartlett, Director, Apex Insurance Brokers Limited · Last reviewed 2026-08-06

If you are building a venture-backed company, an eventual sale is one of the outcomes you are working towards. It might be years away, but the mechanics of how a deal actually closes are worth understanding early, because they shape how much of your exit proceeds you get to keep and how long you stay on the hook after you have signed. W&I insurance sits right at the centre of that, and it is one of the more misunderstood corners of the M&A world. This page walks through what it is, how it works, and why it matters to a founder long before a term sheet ever lands.

What are warranties in a company sale, and why do they matter?

When someone buys your company, they are buying a set of promises as much as a set of assets. In the sale-and-purchase agreement (usually shortened to SPA), the seller gives the buyer a long list of statements about the business: that the accounts are accurate, that there is no undisclosed litigation, that the company owns its intellectual property, that tax has been filed correctly, that key contracts are in good standing, and so on. These statements are the warranties.

Warranties matter because they allocate risk. The buyer is pricing the deal on the assumption that the business is as described. If, six months after completion, a large tax liability or an IP dispute surfaces that contradicts a warranty, the buyer has suffered a loss they did not price in. Traditionally, their remedy is to bring a warranty claim against the seller and recover damages. For a founder, that is exactly the problem: you have sold, you have moved on, and you can still be pulled back into a dispute over money you thought was yours.

Indemnities are a related but distinct mechanism. Where a warranty is a statement that, if untrue, requires the buyer to prove a loss, an indemnity is a specific promise to reimburse the buyer pound-for-pound for an identified risk (a known tax exposure or a specific pending claim, for example). The terms and scope of what an indemnity covers vary from deal to deal and are heavily negotiated, so treat any general description as a starting point, not a rule.

So what does W&I insurance actually do?

W&I insurance transfers the financial consequences of a warranty breach (and, on some deals, certain indemnities) from a person to an insurer. Instead of the buyer chasing the seller for a breach, they claim on the policy. The insurer investigates and, if the claim is valid and within the policy terms, pays the loss.

That single shift changes the shape of a deal for everyone:

• The seller gets a cleaner exit. Instead of leaving a large chunk of the sale price tied up for a year or two as security against warranty claims, more of the proceeds can be distributed. For founders and their early investors, that means cash in hand sooner and less residual liability hanging over them.
• The buyer keeps its recourse. They still have somewhere to go if a warranty proves false, but that somewhere is a well-capitalised insurer rather than a group of former founders who may have spent the proceeds, emigrated, or simply be awkward to pursue.
• The relationship survives. Founders frequently stay on post-sale under an earn-out or an employment contract. Nobody wants their first year working for the new owner to coincide with that owner suing them personally. W&I takes much of that tension out of the room.

The practical effect is that a deal which might otherwise stall over who carries the risk can get done. That is why W&I has become a familiar feature of mid-market and larger transactions, and increasingly appears on smaller deals too.

Larger or more complex risk? Speak directly to a director — call 0117 325 0027 or email info@apexinsurancebrokers.co.uk.

Buy-side or sell-side: who actually takes out the policy?

There are two flavours. A sell-side (seller) policy protects the seller against the cost of their own warranty breaches. A buy-side (buyer) policy lets the buyer claim directly against the insurer for a loss arising from a warranty being untrue.

In practice, most W&I insurance placed today is buy-side, even though it is often the seller who first raises it. A common route is that the seller proposes W&I in the sale process, the buyer takes out the policy, and the cost is shared or negotiated as part of the overall deal economics. Buy-side cover tends to be preferred because it gives the buyer a direct route to the insurer without first having to establish that the seller acted improperly. The exact structure, who pays the premium, and how the two sides split the excess are all points that get negotiated deal by deal, which is why it pays to have specialist input early rather than treating W&I as a box to tick at the end.

What does a W&I policy typically not cover?

W&I is not a magic wand that makes every risk in a deal disappear, and founders should not assume it does. Cover is built around the warranties in the SPA, and there are recognised limits to what insurers will pay for. Precise wording varies between insurers and deals, so the following are general themes rather than fixed rules:

• Known issues. Anything already disclosed in the data room or known to the deal team is generally excluded. W&I is designed for the unknown breach that surfaces later, not for risks everyone was already aware of and priced in.
• Forward-looking matters. Warranties about the future performance of the business, or projections, are usually outside scope. Insurers cover statements of fact, not forecasts.
• Certain specialist exposures. Some categories, such as particular environmental, pension, or transfer-pricing risks, are frequently carved out or handled through separate specialist cover.
• Fraud by the insured. A buy-side policy will not shield a buyer who knew a warranty was false, and cover does not reward dishonesty.

This is exactly why W&I is placed alongside, not instead of, thorough legal due diligence. The quality of the underlying diligence and disclosure directly affects how comfortable an insurer is, how the policy is priced, and how few exclusions end up in the final wording.

What drives the cost of W&I insurance?

There is no single price for W&I, and anyone quoting you a firm number without seeing the deal is guessing. The premium is a function of the transaction in front of the underwriter. The factors that move it include:

• The limit of indemnity — how much cover you want relative to the deal size. A policy might be structured to cover a slice of the enterprise value; illustrative limits such as £5m or £10m are chosen to match the buyer's risk appetite, not fixed by any rule.
• The sector and jurisdiction — a software business with clean, well-documented IP presents differently to a heavily regulated or asset-intensive one.
• The breadth of the warranties — a wide, seller-friendly warranty package asks the insurer to cover more, which is reflected in price.
• The quality of due diligence — strong, well-organised diligence gives underwriters confidence and tends to produce better terms.
• The excess (retention) — the amount you bear before the policy responds. A higher retention generally lowers the premium.

Because these variables interact, W&I pricing is quoted as a rate against the limit rather than a flat figure, and underwriters review the SPA and diligence reports before committing. The honest answer to "what will it cost" is that it depends on the deal, and the way to get a real number is to run it past a broker who can take it to market.

Why should a founder care about this years before an exit?

Because the quality of your exit is built long before the deal room. A W&I underwriter, like a buyer's lawyers, is going to look hard at how the business has been run: whether your IP assignments are properly documented, whether your contracts are signed and filed, whether your corporate records and cap table are clean, whether your tax affairs are in order, and whether your governance has been sensible.

Founders who leave that tidying-up to the final months before a sale often find diligence throws up problems that widen the warranties, increase the excess, or introduce exclusions — all of which chip away at the clean exit W&I is supposed to deliver. Founders who have kept the house in order for years typically find the process smoother and the terms more favourable. Good insurance hygiene and good corporate hygiene tend to travel together.

This is also where your day-to-day insurance programme connects to your eventual exit. A buyer's diligence will look at whether you carried appropriate cover through your growth — which is one reason getting the fundamentals right early, from directors' and officers' insurance (commonly required by investors from around Series A) to the right professional indemnity cover for how you actually operate, pays off twice: once in protecting you along the way, and again in presenting a well-run business at sale. If you want the wider view, our insurance guide by funding stage maps out what matters when.

How does W&I fit into the wider deal process?

W&I runs in parallel with the legal negotiation, not after it. Once heads of terms are agreed, a broker approaches the W&I market, shares the draft SPA and diligence materials under confidentiality, and gathers indications from insurers. An underwriter is then selected, does its own review, and the policy wording is negotiated so that it dovetails with the warranties actually being given. Timing matters: leave it too late and it can hold up completion; start it in step with the legal work and it slots in neatly.

Crucially, W&I is a specialist, transactional product. The wording, the exclusions, the interaction between the policy and the SPA, and the treatment of any specific indemnities are all matters where the detail genuinely decides whether a claim gets paid. This page is a founder's orientation, not a substitute for advice on a live deal. On any actual transaction you should take dedicated transactional legal advice and use a broker who places W&I regularly, because the terms vary meaningfully from insurer to insurer and deal to deal.

The reassuring part is that none of this needs to be a scramble. Founders who have a broker they trust throughout the journey arrive at a sale with the groundwork already done — and that is the position you want to be in when a buyer's lawyers start asking questions. If you would rather talk it through than fill in a form, speak to an Apex specialist and we will help you think ahead.

Apex Insurance Brokers Limited is authorised and regulated by the Financial Conduct Authority (FRN 724952). This article is general information, not advice on a specific policy or a recommendation to buy any product.