Overview of Recent Trends in Warranty Insurance in M&A Transactions

In the current economic climate, the appetite of purchasing parties to take on risk in an M&A transaction has greatly decreased. At the same time, sellers remain under intense pressure to contain outstanding liabilities, and achieve a “clean exit” through an M&A transaction. This Insight looks at the use of Warranty Insurance as an innovative way to “bridge the gap” between buyer and seller in negotiations and as a means to help close transactions where the risk gap between them would have otherwise blocked the signing of a deal. Warranty Insurance not only helps sellers achieve a clean exit, but also can be used by buyer parties to “sweeten their offer” in a competitive auction process, by providing a bidder with the means to accept lower liability thresholds from the seller than it would without Warranty Insurance.

What is Warranty Insurance?

Warranty Insurance is a risk management tool for M&A transactions. For sellers, it can be a strategic tool to increase their rate of return and to achieve a clean exit through a transaction. For buyers, Warranty Insurance can increase their financial protection where there are concerns over recoverability from a seller, or afford them a powerful opportunity to differentiate their bid in an auction process. The warranties continue to play a key role in the underlying M&A transaction, both in flushing-out disclosures and in clarifying contractual liabilities. However, the dichotomy between the buyer’s desire for maximum protection on a warranty breach and the seller’s intent to accelerate receipt of sale proceeds can be eased or even removed through Warranty Insurance. The insurance market offers two types of product: Buy-Side Warranty Insurance (which indemnifies the buyer from the risk of failing to recover from the seller on a warranty claim) and Sell-Side Warranty Insurance (which protects the seller from financial liability to the buyer on a claim), with Buy-Side Warranty Insurance now the more common in the current climate...

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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