Gallagher’s Life Sciences Practice and Specialist M&A team can help companies strategically utilise W&I insurance to deliver a range of transaction benefits*.
Adding value to transactions
The principal function of W&I insurance is to provide financial protection for a buyer or a seller in the event of losses arising from a breach of warranty or a claim under the tax covenant. Coverage can be provided for fundamental, business and tax warranties.
Policies are designed to sit ‘back to back’ with the warranties and match the limitation period in the Share Purchase Agreement (SPA).
Buyer vs. seller policies
Buyer policies allow the buyer to be the named insured and permit the buyer to claim directly against the policy, usually regardless of any rights they have in the SPA to pursue the seller. This allows the seller to limit their liability to a nominal level (in some cases as low as £1) but gives comfort that the policy will effectively ‘replace’ the seller in the event of a breach of warranty.
Seller policies are used to sit behind the agreed seller liability ‘cap’ in the SPA. The selling warrantors are the named insured on the policy and if they are forced to pay a claim, can seek immediate recourse from the insurer. It allows the seller to ring-fence their financial exposure and access sale proceeds immediately.
2018 enhancements
- Low risk known issues flagged in diligence can be affirmatively covered for no additional premium.
- Some standard exclusions can now be removed and consequential loss can be covered.
- Policies can be put in place within 3 days if urgent.
- Excess levels have dropped significantly.
- Market capacity has risen to over £600m (doubled in the last 2 years).
- Synthetic tax warranties and tax deed can be attached to a policy if there is sufficient tax due diligence (DD).
- Knowledge scrapes achievable.
- DD reports can now be completely removed from the definition of Disclosed in the policy for no additional premium.
Key facts:
How much does it cost?
Premium rates are typically between 0.7% - 1.4% of the policy limit (subject to an excess that will mirror a commercially negotiated threshold level in the SPA).
What are minimum premiums?
Minimum premiums are in the region of £20k, making the product more accessible.
What limits are available?
Up to £600m capacity is available.
Benefits of W&I insurance
The need for the policy (in particular, a buyer policy) usually manifests following the seller materially restricting the buyer’s recourse under the SPA, due to a requirement or desire to make a clean exit from the transaction. However, there are a number of other strategic benefits.
Use as a strategic tool
- Competitive auction scenarios - The bidder can include a buyer policy with their bid, allowing the seller to limit liability.
- Questions over seller covenant strength - The buyer may want to transfer the risk of paying a claim from the seller to a reputable insurance company, providing financial security.
- Lender requirements - Certain banks only lend if a policy is in place.
- Fund wind-up and private equity deals - No residual liability can remain, meaning a clean exit from the investment.
- Liquidations - Assets are allocated between creditors and shareholders, so there can be no residual liability.
W&I Insurance does not replace the need for a thorough DD process and full disclosure is essential. Standard exclusions include forward looking statements, certain fines and penalties, secondary tax liabilities and transfer pricing, pension underfunding, and completion purchase price adjustments.
Process
Any W&I policy will ideally incept at the same time that the deal closes and, if initiated in a timely manner, can be negotiated in a parallel work stream to the actual transaction. Our team is determined to work at the speed of the deal, and not allow set transaction timelines to alter – we will work closely with the insured’s legal team to enhance the policy and ensure the wording is the most competitive available in the market.
- Initial Gallagher contact.
- Gallagher briefs insurers on a confidential basis (1 day).
- Insurance market responds with initial indications. Gallagher/Client analyse terms – interrogate market further and select carrier to finalise the insurance piece (2-3 days).
- Insurer instructed.
- Insurer underwrites deal and conducts their own diligence, including an underwriting call (3-5 days).
- Final quote issued and negotiated to counterparty satisfaction (1-2 days).
- Deal executes/policy binds.
Why Gallagher Life Sciences Practice?
Our specialist Life Sciences Practice are located in The Walbrook Building in the City of London. The team offer all you would expect from one of the world’s largest brokers – specialist products and strong influence with the insurers underwriting risks in the Life Sciences sector. We offer a dependable, personal service that seek to exceed your expectations from day one.
- A specialist team with many years’ experience of working with companies in the Life Sciences Sector.
- A personal level of broking and risk management support from a niche broking team but with the backing of a global broking house providing the size and scale to ensure delivery of broad policy cover at competitive levels of pricing.
- Capability to service and advise broad range of companies from early stage through to established publicly traded global organisations.
We offer advice across a number of insurance products including:-
- Directors’ & Officers’ Liability
- Cyber Protection
- Intellectual Property Protection
- Warranty & Indemnity Insurance
- Cargo, Supply Chain & Stock Throughput
- Errors & Omissions and Professional Liability
- Human Clinical Trials Liability
* These are brief product descriptions only. Please refer to the policy documentation paying particular attention to the terms and conditions, exclusions, warranties, subjectivities, excesses and any endorsements.
