Warranty and Indemnity Insurance
Warranty and Indemnity Insurance (W&I) — also known as Representations and Warranty Insurance (RWI) — is a tool for buyers and sellers to transfer the risk of liability that is created by the warranties and indemnities in an acquisition agreement, to a creditworthy insurance company. W&I is a cost-effective alternative to the traditional methods of addressing transaction risks such as an escrow, holdback, purchase price adjustment, parent company or bank guarantee, or to walk from the deal.
Unknown risks like financial statement errors, law compliance, tax, regulatory compliance, and environmental issues are inherent in M&A transactions even following a robust due diligence review. To address this uncertainty, buyers typically seek warranties from the seller and, should an actual or alleged breach arise, indemnities to back them up over a multi-year period. However, these indemnities lock up a portion of the seller’s sale proceeds for a considerable period of time. Well-structured W&I can protect buyers from warranty breaches and eliminate the need for seller indemnification, which allows them to benefit from the full sale proceeds. W&I can be used by sellers and buyers in many strategic ways to facilitate an M&A transaction.
Warranty and Indemnity Insurance
Limiting Liability Post-M&A
- Seller can receive a clean nil-recourse exit allowing for the prompt distribution of funds
- In an auction situation, buyers can use W&I to differentiate their bid by accepting a lower warranty cap and shorter survival period that is offered by the seller
- Eliminating concerns about the creditworthiness of a seller by securing W&I from an A-rated insurer
- Added comfort when buying in unfamiliar jurisdictions or industry sectors
- Claim on insurance rather than on retained management, founder, or JV partner
- Eases acquisition agreement negotiations and related expenses
- Best practice risk management
- Enables board / investment committee approval of an acquisition
Warranty and Indemnity Insurance Korea
Warranty and Indemnity Insurance in Korea continues to be widely used to facilitate local, inbound, and outbound mergers, acquisitions and real estate transactions. W&I was first introduced to Korea’s M&A community in 2007 but it took six years for the first policy to be put into effect as buyers, sellers, and their advisors needed time to better understand W&I’s coverage, implementation process, and strategic uses. The initial policies written in 2013 were used by Korean strategics for acquisitions made abroad to gain added comfort with unfamiliar foreign jurisdictions.
The first Korea-centric W&I policies were placed in 2014 where the seller, target, and buyer were all located in Korea. This was the catalyst for Korea’s W&I growth as news quickly spread among Korea M&A professionals that W&I had been successfully utilized within the country to facilitate a transaction. Today, W&I is well known among Korean M&A professionals and is considered for most types of transactions in Korea and abroad: private equity, strategics, acquisitions, carve-outs, distressed / insolvency, take privates, and minority investments.
Warranty and Indemnity Insurance Market in Korea
AIG was the first underwriter of Warranty and Indemnity insurance to have a policy approved by regulators in Korea. Subsequently, Hyundai Marine & Fire, Chubb, Allianz, and DB (Dongbu) had policies filed and approved with local regulators. Each insurer manages W&I out of their local office, but they rely heavily on underwriting and claim expertise located outside of Korea. Due to its first-mover advantage, AIG has the most experience with W&I policies in South Korea. Due to each W&I insurance policy requiring tailored coverage wording to address the unique and specific language in each acquisition agreement, insureds are recommended to work with insurance brokers and advisors who have a proven team with M&A legal backgrounds in addition to experience drafting policy language, structuring reinsurance programs, and negotiating complex claims.