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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