Whilst it is a commercial decision that is ultimately negotiated between the transacting parties, our clients often ask who should pay the premium and whether the costs can be ‘sliced and diced’?
warranty and indemnity insurance

Depending on the fragility of the sale process, and whether an auction has led to multiple keen bidders, it is often the case that the buyer will pay for the premium in full. It is the buyer that is the insured entity, the same buyer that will be negotiating the policy and the one who will be fully involved during the claims process in the event there is a breach of warranty by the seller.

Furthermore, if there is a competitive atmosphere whereby bidders are desperately looking to differentiate themselves, the buyer may offer to pay themselves. Attaching a W&I policy to a bid, so that the seller can ultimately exit a transaction with no residual liability, will distinguish that bid, especially if said buyer is paying the premium in full.

However, during an ‘off-market’ process or when an auction is not as competitive, it is often the seller that offers to pay the premium. After all, it is the seller who is ultimately benefitting from the policy as they are able to realise funds quickly and exit the transaction with no residual liability and no need for escrow.

In fact, in some instances, the seller will be pushing to pay for the premium. They may need to liquidate or wind-up and if the buyer will not accept limited warranty protection from the seller, the only way the transaction might progress is if the seller pays for the buyer to rely on the W&I insurance. A buyer may even resist the insurance and require the seller to stand behind the warranties, but in practice this position is relatively outdated.

That being said, the premium is now often split between buyer and seller - and not always equally. Since there are differing views on the level of cover required (in our experience between 15% - 30% of Enterprise Value (EV) is usually purchased), the seller is beginning to offer to pay the premium equal to a percentage of EV in the heads of terms.

Sellers often instruct a broker to source indications for a ‘lighter’ limit (perhaps 10%) on the assumption that, if it is not enough, the buyer will ‘top up’ the premium the sellers are willing to pay. This concept is becoming more common and, if added into the heads of terms, it avoids any last minute negotiations on which party pays the premium.

In summary, the premium can be allocated in a number of different ways to suit the deal structure (either balanced or imbalanced). Either way, it is good to address the question as early as possible.