Transactional risk insurance works to protect both buyers and sellers involved in mergers and acquisitions (M&As). It allows organisations to transfer many of their risks to an insurance provider, and away from their balance sheet. Typically, transactional risk insurance encompasses warranty and indemnity insurance (W&I), tax insurance, contingent insurance, as well as due diligence and risk solutions to protect a business throughout the M&A transactions process.

Warranty and indemnity insurance (W&I) covers the unknown risks in an M&A deal – protecting buyers and sellers against financial losses.

What does it cover? A W&I policy will cover the insured for:

• Breach of warranties

• A claim under a tax indemnity

• A claim under a general indemnity for breach of warranty

What does it not cover? The policy will not however cover an organisation for losses arising from: General exclusions

• Known risks / issues known to the buyer

• Disclosed matters – including UK/Europe general disclosure (data room, DD reports, specific disclosures) and US disclosure (specific disclosure schedules)

• Fraud

• Specific indemnities

• Forward-looking statements

• Purchase price adjustments (e.g., leakage/completion accounts)

• Anti-bribery and corruption (depending on jurisdiction)

• Ongoing construction matters

• Professional negligence/errors and omissions

• Pension underfunding

• High risk areas where other lines of insurance would be more appropriate for e.g., environmental, and cyber

General tax exclusions

• Secondary tax liabilities

• Transfer pricing

• Valuation of tax assets

The risk premium on a transaction is normally calculated at 0.6% to 2% of policy limit dependant on size, jurisdiction and sector of the transaction.

A standard policy period in the insurance market can last between two and three years for general warranties, and up to seven years for fundamental and tax warranties.

Claims are always paid out if they meet the conditions for constituting a valid claim. Among other things the following are preliminary conditions that must be met to constitute a valid claim:

• Is the claim in line with the W&I Policy terms? i.e. the notification ought to be made within the policy period

• Confirm that the claim does not fall within any possible general exclusions or specific exclusions that had been agreed upon

• Make sure that the breach was not disclosed against in either the disclosure letter, the data room or the seller / buyer DD reports.

However, many policies are subject to arbitration clauses and are subject to confidential terms and so results are not often made public.

In our experience, the most common claims we receive in Europe are tax, financial statements, litigation, permits, licenses, consents, material contracts and compliance with laws.

We particularly see tax claims in the technology, media and telecommunications (TMT) sectors, where fast growing businesses have failed to keep up with the tax regimes.

When choosing an insurer, we take 3 key things into consideration:

• Premium level

• Coverage capabilities

• Claims handling