Premium
(% of limit purchased)¹

0.60% to 1.50%

2.20% to 3.50%

Policy retention
(% of enterprise value)

0.25% to 0.50% (often tipping to nil and nil for fundamental warranties)

0.50% to 1.00% (retention will typically drop to 0.50% or lower after 12 months)

Tipping retentions are not offered, but nil retention for fundamental reps may be negotiable.

Standard duration

General: 2 years

Fundamental/tax²: 7 years

General: 3 years

Fundamental/tax: 6 years

Underwriting process: written vs. spoken

W&I underwriting process is iterative, relies more on written Q&A, and typically takes 1-2 weeks. The underwriter provides multiple tranches of questionnaires, consisting of general background questions and more detailed questions after the underwriter’s review of due diligence reports. The buyer and advisers provide written responses. An underwriting call is used as needed to work through any remaining issues.

R&W underwriting process is more truncated, does not use formal written questionnaires, and can be compressed to about a week. The buyer and advisers participate in an underwriting call within a few days of the underwriter’s receipt of diligence reports and Disclosure Schedules. If there are any follow-up questions, such questions are typically answered via email.

Seller involvement

In European transactions, sellers running a competitive sale process will often commission third-party diligence reports for prospective buyers, with the expectation that the buyer’s advisers will then need to carry out only limited top-up due diligence.

W&I underwriting process is often initiated by the seller, particularly in a competitive sale process. The seller may engage a broker to obtain insurance quotes and prepare a report on these that the seller can provide to prospective buyer(s) (a “soft staple”). Alternatively, the seller may decide to go further and work with a broker to select an insurer and prepare a suitable policy for the buyer (a “hard staple”). The latter is usually seen only in an auction sale process on a short timeline.

In US transactions, sell-side diligence reports are rare. Buyers’ advisers (and/or in-house subject matter experts) typically carry out full-scope due diligence.

Buyers typically run the entire R&W underwriting process (starting with broker engagement) without any direct interaction between the seller and the broker/the insurer.

Disclosure and level of knowledge

In European transaction agreements, it is customary for (i) documents in the data room and (ii) certain public databases to be “generally disclosed” against the warranties.³ While such general disclosure does not preclude the seller from also making specific disclosures in the Disclosure Letter, it does create more risk for the buyer by bringing in a much wider set of matters that could prevent the buyer from making a warranty claim.

W&I policies generally follow the above European approach on general disclosure. In addition, they typically deem the contents of buy-side diligence reports disclosed.

In US transaction agreements, the data room is used merely as an information repository, and the seller must make specific disclosures in the Disclosure Schedules to carve out such matters from the scope of the representations.

R&W policies generally follow this US approach. The data room and diligence reports are not deemed disclosed, and the onus is on the underwriter to add any exclusions based on issues identified during the buyer’s diligence.

Deemed modifications to representations and warranties

In European transaction agreements, warranties are typically drafted as relatively short sentences on specific matters of different areas of the business. In France, in a competitive sale process, the transaction agreement generally contains limited warranties (with sometimes only fundamental warranties) at the auction phase.

W&I policies often contain a stand-alone “warranty spreadsheet” explicitly identifying cover position for each warranty (cover, partial cover, exclude) and any deemed modifications.

In US transactions, representations cover similar categories of topics as European transactions such as capitalization, financial statements, IP, and employee matters, but each category is fleshed out in more detailed paragraphs.

R&W policies do not contain a warranty spreadsheet, and representations are covered unless otherwise specified. Deemed modifications to the representations or Disclosure Schedules are proposed on a limited basis.

Synthetic representations and warranties⁴

Depending on the circumstances, W&I insurers are willing to provide synthetic warranties for the purposes of the policy where the seller is unwilling or unable to make the warranties in question in the transaction agreement. Currently, certain insurers offer entire warranty suites on a synthetic basis in some markets. Data room and buyer diligence reports will remain disclosed against those warranties.

Typically, R&W insurers are unwilling to offer synthetic representations.

Loss

European jurisdictions vary in their approach to what constitutes loss and how that loss is calculated for the purposes of a buyer claim for damages.

In the UK, the transaction agreement will not necessarily define loss but will generally exclude certain types of loss such as loss of profit and indirect consequential loss. The measure of damages for the relevant loss will be on a contractual basis, which typically involves calculating the diminution in value of the shares acquired.

In France, the transaction agreement usually contains a definition of loss that includes direct, foreseeable and actual loss but excludes lost opportunities and loss of reputation. The loss for which the buyer may claim is calculated on an indemnity basis but the agreement will generally disapply any multiple that the buyer used to determine the purchase price.

In Germany, it is common for the transaction agreement to contain a contractual definition of loss, which would typically include (i) direct losses; (ii) foreseeable indirect and consequential losses; and (iii) loss of profit. Damages are typically awarded on the basis of the diminution in value of the shares acquired (with any damages based on multiples being generally excluded).

W&I policies generally allow the buyer to recover the amount which it is entitled to claim under the transaction agreement (disregarding any contractual caps).

In US transactions, the definition of losses is often broad. If R&W insurance is used, such definition typically does not exclude (and is silent on) multiplied, consequential, and similar damages, and is intended to make the buyer whole for losses suffered as a result of a breach. If the transaction is structured as a walkaway deal, the seller does not provide any indemnity and the transaction agreement does not contain any definition of losses.

In R&W policies, the definition of losses is similarly broad. As long as the transaction agreement is silent as to the availability of multiplied damages, consequential damages, diminution in value, lost profits, the R&W policy does not exclude those amounts.

Exclusions

W&I insurers tend to have less appetite and more stringent diligence requirements than R&W insurers, which tends to result in a greater number and broader scope of deal-specific exclusions.

W&I policies may contain the following exclusions that are not standard in R&W policies⁵: structural defects, condition or sufficiency of assets, specific labor law matters (holiday pay), cyber risks, product liability and recall, bribery (in high-risk jurisdictions), and certain financial reserves.

Materiality scrape/ de minimis

European transactions generally apply a small claims de minimis; therefore, warranties are not usually materiality qualified, except where needed to manage disclosure burden. Instead, the de minimis applies to all buyer claims against the seller.

W&I policies also include a de minimis, which is independent from the de minimis amount agreed upon by the parties and will be determined by the materiality threshold(s) applied in buy-side due diligence. Insurers may be willing to scrape materiality qualifiers in warranties and rely solely on the de minimis.

In US transaction agreements, materiality qualifiers are more widely used in representations, but it is customary for the seller to “scrape” such qualifiers for purposes of determining (i) whether a breach has occurred and/or (ii) the amount of losses, typically for both when R&W insurance is used. It is uncommon to have a claims de minimis, especially if R&W insurance is used.

R&W policies routinely follow the materiality scrape contained in the transaction agreement and, in deals with no seller indemnity, provide a similar synthetic materiality scrape in the policy (provided the insurer is comfortable with the seller’s disclosure practices and approach to information sharing). R&W policies generally do not have a de minimis, so every claim or loss erodes the retention.

Knowledge scrape

In European transactions, the inclusion of knowledge qualifiers is common for certain warranties (e.g., no circumstances existing that may lead to a claim against the company). In a competitive sale process, the sellers will often seek to knowledge qualify the entire suite of business warranties.

W&I insurers are typically willing to neutralize excessive usage of knowledge qualifiers by sellers by scraping such qualifiers for warranties that should be flat.

In US transactions, knowledge qualifiers are typically used on a limited basis for matters beyond management’s reasonable knowledge or negotiated as a matter of risk allocation between buyers and sellers.

R&W policies generally do not scrape knowledge qualifiers.

Statements of historical fact about the target

Warranties⁶

Representations and warranties⁷

Transactional risk insurance

Warranty and Indemnity Insurance

Representations and warranties insurance

Insurance deductible

Excess

Retention

Consummation of the transaction

Completion/Closing

Closing

List of explicit disclosures

Disclosure letter (UK) or Disclosure schedules (EU)

Disclosure schedules