07 September 2022
Warranty & Indemnity Insurance for SME's
An insurance product affording SMEs invaluable protection against loss arising during a transaction
As demand for M&A insurance continues to grow, the market is responding with new products and innovations, particularly for SMEs.
Until recently, Warranty and Indemnity (W&I) insurance premium pricing made the use of the product commercially unviable for SME transactions, leaving parties uninsured and reliant on more traditional risk allocation mechanisms such as escrow arrangements. However, with the ever-growing competition amongst insurers (currently c. 30 W&I insurers in Europe alone), underwriters have been keen to differentiate themselves through new offerings. Certain insurers have expanded their appetite to include sales of SMEs, by materially lowering their minimum premium levels, reducing the time taken to quote, and focussing their underwriting process and coverage considerations on matters that are most relevant to SME transactions.
The principal function of W&I insurance is to provide financial protection for the insured (which can be either a buyer or seller), from loss arising from a breach of warranty or claim under the tax covenant. In the context of an SME transaction, W&I insurance can be used for deals with an Enterprise Value (EV) as low as GBP/EUR 1m allowing buyers and sellers to gain the same benefits and protections which W&I allows on larger transactions.
A W&I policy permits sellers to achieve a ‘clean exit’, by reducing the buyer’s recourse under the sale agreement to as low as GBP/EUR 1. Additionally, there are a number of other strategic benefits:
• Competitive auction scenarios – a bidder can include a buy-side policy as part of their bid, allowing the seller to limit liability and making their bid more attractive (but without necessarily lowering the purchase price)
• Seller covenant strength – buyer may want to transfer the risk of paying a claim from seller to a reputable insurance company
• Lender requirements – certain banks will only lend if a W&I policy is in place
• Management Rollover - desirable where the warrantor(s) remain within the business post-sale. A buy-side W&I insurance policy means the buyer does not need to bring a claim against a manager
• Insurance pays out – Gallagher has an in-house M&A claims team who ensure a fast and efficient claims process.
The level of coverage W&I insurance can provide is similar for both traditional (mid-market / large) M&A transactions and SME deals. Whilst W&I insurance does not remove the need for a standard disclosure process and external analysis to be carried out on each area warranted (as it does not cover gaps in due diligence), insurers within the SME space are taking a practical approach to such transactions. For example, specialist SME underwriters:
• Are usually comfortable with internal rather than external due diligence
• Remove the need for an underwriting call, making the process more streamlined for all parties involved
• Quote premiums as low as GBP/EUR 20k.
Over the last year, the market has progressed even further and there is a new product which can be used specifically on transactions with an EV of between GBP/EUR 250k and 10m (these figures are somewhat flexible). Currently, this product is only offered to sellers as the insured, though the buyer can be added as a loss payee. The process has been carefully streamlined, so that policies can be put in place within 24 hours and with no requirement for any due diligence (whether internal or external).
The insurance market is continuously innovating and creating new ways to cater to the SME community. Gallagher’s Transactional Risk team can help you secure the right level of W&I coverage for all types of businesses, as well as standalone tax and litigation risks. If you would like to learn more about SME W&I insurance, please contact us for a confidential discussion.
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Arthur J. Gallagher (UK) Limited is authorised and regulated by the Financial Conduct Authority. Registered Office: The Walbrook Building, 25 Walbrook, London EC4N 8AW. Registered in England and Wales. Company Number: 119013.