Warranty and Indemnity (W&I) Insurance Explained

Buying or selling a company always carries the risk that something in the seller's disclosures turns out to be wrong — an undisclosed tax liability, an overstated customer contract, or a compliance breach nobody flagged during due diligence. Warranty and indemnity (W&I) insurance has become a standard tool for managing that risk, shifting potential breach-of-warranty claims away from the deal parties and onto an insurer, and it now features in a large share of private equity and corporate M&A transactions.

What Is Warranty and Indemnity Insurance?

A share or asset purchase agreement typically includes a long list of warranties — factual statements the seller makes about the target business, covering areas like financial accounts, tax compliance, material contracts, employment, litigation, and intellectual property. If a warranty turns out to be untrue and the buyer suffers loss as a result, the buyer can normally claim against the seller. W&I insurance is a policy, usually taken out by the buyer (buy-side W&I) though sometimes by the seller (sell-side W&I), that pays out on valid warranty claims instead of, or alongside, the seller being directly pursued.

Why Deal Parties Use It

For sellers, particularly private equity funds exiting a portfolio company, W&I insurance allows a cleaner exit. Instead of leaving a chunk of sale proceeds in escrow for one or two years to cover potential warranty claims, or remaining contractually exposed to the buyer long after the deal closes, the seller can distribute proceeds to investors immediately and let the insurer carry the ongoing warranty risk. This is often described as a "clean exit" and is now close to standard practice on sponsor-to-sponsor private equity deals.

For buyers, W&I insurance provides a more creditworthy source of recovery than chasing an individual seller or a fund that may have since been wound up, and it can smooth negotiations by reducing the adversarial pressure around the warranty package — the buyer isn't negotiating directly against the people it may need to work with post-completion if management is staying on.

How the Policy Is Underwritten

W&I insurers price and structure cover based on the same due diligence the buyer has already commissioned — financial, tax, legal, and commercial reports — rather than running fresh diligence themselves. This means the quality and scope of a target's due diligence process has a direct bearing on what cover is available and at what premium; gaps in diligence usually translate into specific exclusions in the policy. Underwriters typically exclude known issues flagged during diligence (these are handled separately, often through a specific indemnity), and commonly exclude areas like pension liabilities, environmental contamination, and transfer pricing unless additional cover is specifically negotiated and priced.

Policies carry a retention (the insurance equivalent of an excess) below which claims aren't covered, typically around 0.5-1% of enterprise value, alongside a policy limit, premium (commonly 1-2% of the limit purchased), and a claims period that usually runs longer for tax and fundamental warranties than for general business warranties.

What It Doesn't Cover

W&I insurance covers breaches of the warranties given in the purchase agreement — it does not protect against the deal simply underperforming relative to expectations, and it doesn't cover specific indemnities for known risks identified during diligence (those are typically retained by the seller or separately insured). Fraud by the seller is also generally excluded from cover for the party committing it, though an innocent buyer can usually still claim.

How It Interacts With the Rest of the Deal

W&I insurance doesn't exist in isolation from the rest of the purchase price mechanism. Where part of the price is deferred through an earn-out, the buyer and seller need to agree how a successful W&I claim interacts with any earn-out payments still outstanding, since both are ways of allocating risk around the same underlying uncertainty about the target's true financial position at completion.

Buy-Side vs Sell-Side Policies

Buy-side policies are far more common in practice. The buyer is the insured party, claims directly against the insurer, and the seller's liability under the warranties is usually capped at a nominal amount (often £1 or a similarly token figure) once the policy is in place, with the insurer standing fully behind the warranty package. Sell-side policies work differently: the seller remains the party facing a claim from the buyer under the purchase agreement, but can then claim against their own policy to cover any payment made, essentially insuring their own warranty exposure rather than removing it from the buyer's recourse. Because buy-side structures are cleaner and give the buyer a direct claim path, most insurers and brokers now steer deals toward buy-side cover as the default, with sell-side policies reserved for specific situations such as auctions where bidders haven't yet been able to arrange their own buy-side terms.

FAQ

Who usually pays for W&I insurance?
On buy-side policies the buyer typically arranges and pays the premium, though in competitive sale processes sellers increasingly require bidders to have W&I cover lined up before submitting a final offer.

Does W&I insurance replace the need for warranties in the purchase agreement?
No — the insurance sits on top of the warranty package already negotiated in the sale and purchase agreement; it changes who ultimately pays a valid claim, not whether warranties are given.

How quickly can a W&I policy be put in place?
On a well-run process with good diligence reports available, insurers can typically turn around terms within one to two weeks, though complex or international deals take longer.

Understanding how risk is allocated and insured in corporate transactions is a core part of the deal-structuring content covered across Learnsignal's ACCA and CPD courses for finance professionals.

The pricing mechanism chosen for the deal also shapes how W&I cover is used — see our comparison of locked box and completion accounts for how each approach allocates risk between signing and completion.