Warranty & Indemnity (W&I) insurance can be a vital ingredient in any M&A transaction, particularly in the real estate sector.
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Sellers have now become accustomed to the product as it negates the need for escrow and allows for their clean exit. For a buyer, the W&I policy can give them protection (in the form of a reputable insurance policy) in case of a breach of warranty by the seller.

It is paramount for lawyers to be kept abreast of W&I enhancements and new levels of cover that have recently become available. Sticking points, such as known tax issues, might have previously derailed deals; but now these matters can often be wrapped into a W&I policy for no extra cost. Law firms act as crucial intermediaries between client and broker, due to their proximity to Sale and Purchase Agreements (SPA) negotiations.

It is important that the legal team know who to contact in the event of a seller being asked to provide a large escrow or indemnity by the buyer – to not suggest an insurance route might be deemed negligent, as a W&I policy could result in a much smaller cost to a client than paying out themselves for a breach of warranty.

Real Estate project lifecycle & utilisation of W&I

Feasibility Analysis, Financing and Acquisition

  • Buy-side transactional risks
  • Lender conditions
  • Legal indemnity and challenges to title

Disposal or Demolition

  • Sell-side transactional risks, including tax liability.

Own, Operate & Maintain

  • Property and liability risks
  • Loss of income, loss of attraction
  • Terrorism and security perils
  • Political risks, from capital controls to changing regulation
  • Financial risks and management liability
  • Cyber risks

Project Construction

  • Bid and performance bonds
  • Complex green site or existing structure risks
  • Delay in start up
  • Environmental risks

W&I: Step by Step - Asset Marketed

1). Initial review of asset

Share deal: Gallagher will provide advice and guidance on the most appropriate diligence approach needed to obtain W&I insurance so that the seller can limit their liability to as low as £1. Gallagher will review any potential title issues and provide indications for cover.

2). Sale Agreement drafted

Share deal: Gallagher will review the early draft set of warranties, discuss with the insurance market and provide a full report/ recommendation as to which insurer to proceed with based on coverage/ price and ability to be commercial/ hit tight timelines

3). Final bid / offer submitted

Attaching the W&I policy to the final bid will make the offer much more attractive to the seller and may form the competitive component that is required to edge into exclusivity

4). Exclusivity and Due diligence Process

Share deal: Gallagher will review the draft DD reports with the selected insurer and provide a more comprehensive coverage position, which may include affirmative cover for known risks that have arisen during the diligence process. Gallagher is also able to undertake specific insurance DD if that is required.

Any title issues flagged within the DD will be reviewed and options to protect your asset will be provided, giving comfort to you and lenders.

5). Sale Agreement negotiations

Share deal: Gallagher will work with the insurer and the lawyers to make sure that as many warranties as possible are covered as drafted. Any type of property transaction: Fundamental warranties can be covered under a standalone title policy to the full value of the transaction.

6). Property Insurance negotiated

Gallagher will provide a review of the following property insurances that the target currently has in place:

  • Property damage
  • Loss of rent
  • Liability
  • Terrorism
  • Engineering
  • Any other relevant covers

7). Completion