11 March 2024
Fundamental Warranty Top Up Market Update:
Warranty & Indemnity vs.
Title Insurers
In recent months, there has been a notable shift in the insurance market's appetite for covering fundamental warranties, marking a significant development in transactional risk management. This update provides an overview of the current insurance market position and offers insights for clients to navigate and access the coverage they require.
The use of insurance to cover the fundamental warranties within a transaction has been prominent for over a decade now. While Warranty & Indemnity (W&I) insurers typically cover all fundamental, general, and tax warranties up to approximately 10-30% of the purchase price (at a rate of about 1% of the W&I limit), title insurers, a distinct group within the London market, traditionally step in to cover fundamental warranties beyond the W&I limit, extending coverage up to the full purchase price. The common view is that fundamental warranties are binary risks and so to have cover for anything less than the purchase price would arguably be futile, especially if the seller is limiting their liability to GBP1.
Whether the title markets were using their traditional Title to Shares policies or their more recent Fundamental Warranty Top Up product, these solutions were considered cost efficient as the top up rates have always been c. 0.075% - 0.2% of the total limit/ purchase price (vs the W&I minimum top up rates that have traditionally landed at c. 0.6%).
The capacity within the title insurance market has been customarily as high as GBP1.2bn for a single deal (sometimes from a single insurer), meaning that most deals - both real estate and operating business transactions - have benefitted from this solution. These policies were easy to procure and could often be underwritten and put in place within 3-4 working days. However, due to various complex claims notifications related to fundamental warranties, the capacity of the title markets has dramatically decreased, reaching as low as GBP50m - GBP100m for certain jurisdictions. Not only has the capacity been difficult to source, the coverage has been restricted, as target insolvency and shareholder loans can no longer be covered by the title market.
Key takeaways
- The insurance markets are changing rapidly; it's crucial to stay close to your broker who stays abreast of the latest developments and has a joined-up team working across both markets.
- Coverage is available, but due to challenging conditions and the potential involvement of multiple insurers, turnaround times will be slower.
- Premiums may be affected by desired coverage levels, so engage your broker early for budgetary indications to avoid surprises later in the transaction.
Where are we now?
As such, some of the larger deals (above GBP50m - GBP100m) are looking back to the W&I market to offer this additional top up protection, since a W&I market will be insuring the Fundamental Warranties (along with all other warranties) up to 10% - 30% of the purchase price anyway. Whilst the traditional lowest rate for a W&I insurer to participate in an excess capacity would be 0.6%, some insurers have reduced this to as low as 0.3% to cover only Fundamental Warranties, so long as there is enough premium available in the deal (i.e. they might need a minimum line of GBP20m to justify participation).
Although there is theoretically a total W&I capacity of c. GBP1bn, it is not likely that any insurer would put out more than GBP30m - GBP50m for each deal, meaning that to secure capacity for a deal value of GBP1bn, at least 20-30 W&I insurers are likely to be utilised. This could result in a heavy administrative burden and a substantial increase in workload, especially considering the involvement of multiple insurers.
Where next - and why Gallagher?
Whilst the traditional title market might not currently be able to assist with the bigger deals, the W&I market has begun to see an opportunity and lower their rates slightly to provide a more palatable solution than they once could (albeit at least three times as expensive and more cumbersome than what the title market used to offer). Inevitably at some point, capacity will return from the title markets. But in the short term, the W&I insurers have spotted an opportunity to capitalise on a shift in the market and to write more premiums after a slow and challenging 2023.
The Gallagher Specialty Transactional Risks team has recently been involved in advising on a deal that required negotiations with 25+ W&I insurers, a significant contrast to the single title insurer we used to require. This experience provides us with first-hand knowledge of managing this challenging market shift. Concurrently, our specialist Title team is in constant discussions with the title market around the potential return of capacity in that market, and/or exploring the possibility of new capacity entering the title market. In addition, they are still assisting with identified title risks commonly referred to as ‘known risks’ either in isolation or as part of a title to share/real estate policy. We recognise the complexities involved in structuring both the W&I and Fundamental Top Up policies, as well as managing this very complex and time-consuming process. Covering the Fundamental Warranties (up to the full purchase price) could be paramount to getting a deal over the line. We're committed to sourcing the necessary capacity to support your needs at the best available price.
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