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Warranty and indemnity insurance
W&I insurance covers unknown breaches of warranty, so it usually excludes anything the buyer already knew, forward-looking statements, price adjustments and risks the due diligence did not examine. Knowing the exclusions early tells you which risks still need a price reduction, a specific indemnity or separate insurance.
Part of: Warranty and indemnity insurance explained
In short
A W&I policy is designed for the unexpected. It commonly excludes matters the buyer's deal team knew about, anything disclosed in the data room or disclosure letter, forward-looking warranties such as forecasts, purchase price adjustments and covenants, and some sector risks such as defined benefit pension underfunding, asbestos or pollution. Underwriters also add deal-specific exclusions where the due diligence was thin. These are market practices rather than rules of law, and wordings differ. Known risks are usually handled by a price adjustment, a specific indemnity from the seller, or separate tax or contingent risk insurance.
Warranty and indemnity insurance pays for loss caused by a breach of warranty that nobody on the buyer’s side knew about. It is not designed to pay for problems that are already visible, for the commercial risk of the deal, or for areas the buyer chose not to investigate. Exclusions keep the policy to that purpose.
Exclusions come in two types. Standard exclusions appear in most W&I policies in some form. Deal-specific exclusions are added after the insurer reads the due diligence and reflect the particular target. Both are negotiated, and the wording on any deal can differ from what follows.
Exclusions sit alongside the other limits in the policy: the retention the buyer bears before the insurer pays, the overall limit, and the policy period for each type of warranty. Read together, they show how much of the seller’s contractual risk has actually moved to the insurer, and how much remains with the buyer or the seller.
| Exclusion | What it typically means | How the risk is often handled |
|---|---|---|
| Known matters | Anything the deal team actually knew before signing or completion, and matters fairly disclosed | Price reduction or specific indemnity |
| Forward-looking warranties | Forecasts, projections and statements about future performance | Buyer’s own commercial judgement |
| Price adjustments and covenants | Completion accounts, locked box leakage and the seller’s promises about future conduct | SPA mechanics, escrow or set-off |
| Defined benefit pension underfunding | Deficits in a final salary scheme and related funding liabilities | Price, specific indemnity or pensions advice |
| Fines and penalties | Fines and penalties that cannot lawfully be insured | Compliance and specific indemnities |
| Asbestos, pollution and contamination | Often excluded or limited, especially for property-heavy or industrial targets | Environmental reports and separate cover |
| Areas not diligenced | Any warranty area the due diligence did not cover properly | Commission further diligence |
| Identified tax issues | Known tax risks and, often, secondary tax liabilities of other group members | Tax insurance or a tax indemnity |
Other exclusions sometimes seen, depending on the target, include product recall, cyber incidents, sanctions and anti-bribery warranties, underpayment of wages and transfer pricing. Ask the broker which apply to your deal and whether any can be narrowed.
The most important exclusion is usually knowledge. If the buyer’s deal team knew a warranty was untrue, the policy will not pay for it. That avoids the buyer signing a deal, knowing of a problem, and then claiming on insurance.
W&I policies commonly define knowledge by reference to a short list of named individuals and their actual awareness, rather than everything the company might be said to know. That matters because the default under the Insurance Act 2015, section 4 is wider: a company knows what its senior management, or those responsible for its insurance, know, and is treated as knowing what a reasonable search would have revealed. Check how the policy defines knowledge and who is on the list.
Before the policy is bound the insured must also make a fair presentation of the risk under section 3. On a buy-side policy that is the buyer. See the fair presentation duty and the known circumstances exclusion.
Defined benefit pension deficits are a common exclusion because they are hard to value and can attract regulatory action. Under section 38 of the Pensions Act 2004, the Pensions Regulator can issue a contribution notice requiring the employer, or a person connected with or an associate of the employer, to pay a specified sum to the scheme. The notice can relate to an act or deliberate failure to act within the six years ending with the warning notice, where the statutory tests are met and the Regulator considers it reasonable to impose liability.
A buyer of a company with a defined benefit scheme should expect pension risk to sit outside the W&I policy and to be dealt with in the price or by specific protection. Our page on pension trustee run-off and the Pensions Regulator covers the trustees’ side.
Similar logic applies to some environmental and asbestos risks. Where these matter, insurers commonly want environmental reports before narrowing an exclusion; see pollution exclusion and asbestos exclusion.
The seller’s disclosure letter qualifies the warranties. Under most SPAs a matter fairly disclosed is treated as an exception to the warranty, so there is no breach for the policy to cover. Sellers sometimes see a buy-side policy as a reason to disclose less, but thin disclosure tends to lead to more questions from the insurer, more exclusions and a weaker position for the seller if fraud is ever alleged.
Illustrative: legal due diligence on a logistics company flags a dispute with a former driver over holiday pay. The insurer excludes that claim. The buyer negotiates a specific indemnity from the seller for it, and the rest of the employment warranties remain insured.
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 draft SPA, the due diligence reports, the disclosure letter and any known issues. See warranty and indemnity insurance explained, due diligence and W&I underwriting and how W&I claims work.
Usually not. Matters the buyer's deal team knew about, or that were fairly disclosed, are commonly excluded because the policy is meant to cover unknown breaches. Known issues are typically handled by a price reduction, a specific indemnity from the seller, or separate insurance such as tax insurance where the risk can be underwritten.
Generally no. Warranties about forecasts, projections or future performance are commonly excluded, as are purchase price adjustments and the seller's covenants about future conduct. W&I is designed to cover statements about the business as it stood when the warranties were given.
Defined benefit pension deficits are hard to value and can attract action by the Pensions Regulator, including contribution notices under section 38 of the Pensions Act 2004. Insurers commonly exclude them, so buyers deal with pension risk through the price, specific protection in the SPA or specialist advice.
Often, yes. Standard exclusions can sometimes be narrowed, and deal-specific exclusions may be reduced if further due diligence fills the gap the insurer was worried about. The scope depends on the insurer and the target, so ask your broker to compare the exclusions offered by each market.
It is not a good idea. Matters left out of the disclosure letter tend to prompt more underwriting questions and more exclusions, and a seller who withholds known problems remains exposed if fraud is alleged. Full disclosure usually produces a cleaner policy and a cleaner exit.
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.
