W&I insurance has historically been prevalent within certain sectors as transactors recognised the strategic benefits to be gained from limiting their liability.
On the sale side, the cover effectively allows the seller to limit their liability to £1 and make a completely clean exit from a transaction. Conversely, the buyer policy allows the purchaser to claim directly from the insurer in the event of a breach of warranty by the seller, regardless of any rights they have in the Sale & Purchase Agreement (SPA) to pursue the seller.
However, W&I cover has traditionally been met with resistance by some circles of the legal community. It must be said that, until recently, the process of arranging W&I insurance was cumbersome, costly, and onerous. It became evident for more complex transactions that insurers needed every stone unturned in order to provide coverage for certain warranties. Markets would also predominantly be attracted to certain sectors on account of preferable risk profiles, while other sectors fell outside the appetite of insurers - leaving transactors unable to secure cover. It is therefore understandable that in some cases, lawyers were unwilling to highlight the coverage available to their clients.
That said, in recent years - and particularly in the last six months - the W&I and Tax Insurance market has evolved dramatically. Market capacity has tripled in two years with 23 insurers offering W&I cover in almost all jurisdictions and sectors globally. Insurers can no longer ‘pick and choose’ the deals that they want to underwrite and have had to become far more commercially minded in respect of premium, breadth of coverage and efficiency of process. In short, the W&I insurance market has listened the concerns of transactors and their lawyers, and have worked to make the product far more relevant and palatable.
Take price as the first example of change; W&I rates have dropped from circa 1%-2% several years ago, to 0.5%-1%. Minimum premiums required by insurers have dropped from £100,000 to £25,000 in the last three months alone. Average excess levels have also reduced dramatically, from 1.5% in 2015, to between 0%-0.5% today (depending on the sector). Insurers are becoming wise to the fact that, due to the sheer volume of new entrants to the market, there is significant competition for every M&A deal that comes to the market and as such, they need to be aggressive in setting their rates in order to secure new business.
In terms of coverage, ‘low risk known issues’ (that were previously excluded as standard) are now being included within coverage as the race for differentiation amongst insurers continues. These known tax risks that had the potential to derail deals in the past, are now being included at no extra cost - predominantly due to the fact that there are more tax underwriters in the market and the experience of underwriting these risks has broadened over the years.
Finally, the process itself in respect of placing insurance for a transaction has become far less cumbersome. On account of competition, insurers realise that their reputation is at stake if they take too long to consider and finalise cover. As such, the vast majority are willing to take more of a strategic view on certain items that may previously have delayed coverage being put into place; in the past, insurers wanted sufficient time for extensive due diligence to take place. Today, insurers will still expect to see due diligence completed for areas being warranted, but they are becoming more accepting of internal financial and tax due diligence - provided these are in a report form and carried out by individuals with the necessary qualifications to do so. On overall timing and speed of placement, insurers are now able to get fully tailored, fully negotiated policies in place within 5-7 working days of first contact with the transactors, or law firm.
As a result of these changes, W&I insurance should now be a consideration for any single private transaction, regardless of jurisdiction or industry. There are immense benefits to be gained by both buyer and seller alike, and now that the coverage is broader, better priced, and far quicker to transact, we recommend that lawyers speak to us when they have a M&A deal on the table, to see how Gallagher might be able to assist.
