What’s in this Article
You’re selling your company for £25 million. The share purchase agreement includes 80 pages of warranties—representations about the business’s financial condition, legal compliance, intellectual property ownership, customer contracts, and employee matters.
The buyer’s position: “If any warranty proves incorrect, we claim damages from you personally as the selling shareholders.”
Your exposure: Potentially millions if undisclosed liabilities emerge post-completion. The warranties survive for 18-24 months (some longer for tax and title warranties), creating prolonged tail liability.
Warranty and indemnity insurance—W&I insurance—transfers this liability from selling shareholders to an insurer, allowing clean exits for sellers and providing buyers with financial recourse if warranties breach without pursuing individual sellers.
This article explains what warranty and indemnity insurance UK transactions actually use, how W&I coverage works in practice, who pays and why, and when W&I insurance makes commercial sense versus seller retention of warranty risk.
What Warranty and Indemnity Insurance Actually Is
W&I insurance covers breach of warranties and indemnities in M&A transactions. It’s fundamentally different from D&O insurance—it’s transaction-specific, not ongoing governance coverage.
The basic mechanism:
In M&A deals, buyers require sellers to provide warranties—factual statements about the business being acquired. Typical warranties cover:
- Financial statements accuracy
- No undisclosed liabilities
- Legal compliance and regulatory status
- Intellectual property ownership
- Employee matters and no outstanding disputes
- Customer contract terms and no threatened cancellations
- No pending or threatened litigation
- Tax compliance and no outstanding tax liabilities
Standard SPA warranty structure without insurance: If warranties prove incorrect post-completion, buyers claim against selling shareholders. Sellers typically limit their exposure through:
- Aggregate caps (e.g., 100% of purchase price for fundamental warranties, 30-50% for general warranties)
- De minimis thresholds (no claims under £25,000)
- Time limits (18-24 months for general warranties, 7 years for tax)
- Disclosure process (disclosed matters aren’t warranty breaches)
How W&I insurance changes this: Instead of claiming against sellers, buyers claim against the W&I insurance policy. The insurer pays breach of warranty claims up to policy limits, protecting sellers from personal liability and providing buyers with financial recourse from a solvent counterparty.
According to research from Marsh Commercial, W&I insurance was used in approximately 45% of UK private M&A transactions over £50 million enterprise value in 2023, up from approximately 20% in 2018—indicating rapid growth of W&I as standard transaction infrastructure rather than occasional deal enhancement.
D&O Insurance UK: What Founders and Boards Actually Need →
Buy-Side vs Sell-Side W&I Insurance
W&I policies can be purchased by buyers or sellers, creating different coverage structures and incentives.
Sell-side W&I insurance (less common). Sellers purchase the policy pre-completion, covering their warranty liability to buyers. If warranties breach, the insurer pays claims and sellers have no further exposure (subject to policy limits and exclusions).
Advantages for sellers:
- Clean exit with no tail liability
- Can negotiate higher purchase price by eliminating warranty risk for buyers
- Particularly valuable for multiple sellers with different risk appetites
Disadvantages:
- Sellers pay premium (£150,000-£400,000+ depending on deal size)
- Buyers may demand seller warranties persist alongside insurance
- Less control over claims once deal completes
Sell-side use cases: Founder exits where clean break is critical, private equity exits with portfolio company sales, multiple selling shareholders with desire to eliminate post-completion coordination on warranty claims.
Buy-side W&I insurance (most common). Buyers purchase the policy post-completion, covering warranty breaches. If warranties breach, buyers claim against the insurance rather than sellers.
Advantages for buyers:
- Clean claim process without pursuing individual sellers
- Solvent counterparty (insurer) rather than former shareholders who may be difficult to locate
- Can often negotiate higher warranty coverage than sellers would agree to retain
Advantages for sellers:
- Eliminate or substantially reduce warranty liability
- Buyers paying premium, not sellers
- Clean exit without prolonged warranty exposure
Buy-side use cases: Competitive auctions where buyers enhance bids by offering sellers minimal warranty retention, management buyouts where ongoing relationships make warranty claims awkward, private equity acquisitions as standard practice.
Market trend: Buy-side W&I has become dominant in the UK market (80%+ of W&I policies). Buyers use it as competitive advantage in auctions and private equity buyers deploy it as standard acquisition infrastructure.
Typical W&I Insurance Structure and Limits
W&I insurance M&A UK deals follow common structural patterns.
Policy limits: Typically 10-30% of enterprise value for general warranties. Fundamental warranties (title, authority, capitalization) often covered at 100% of enterprise value.
Example: £20 million acquisition might have £3-5 million general warranty coverage, £20 million fundamental warranty coverage.
Retention/excess: Buyers retain first loss—typically 0.5-1% of enterprise value. Claims below this threshold aren’t covered; claims above it are paid by the insurer (subject to policy limit).
Example: £20 million deal with 1% retention means buyers absorb first £200,000 of warranty claims. Claims of £500,000 would see insurer paying £300,000 (after £200,000 retention).
Seller liability cap: Sellers typically retain some warranty liability below the insurance retention. Common structure:
- Sellers liable for first £200,000 (the policy retention)
- Insurance covers £200,000 to £5 million
- Sellers have no liability above £200,000 unless fraud or deliberate breach
Alternative structure eliminates seller liability entirely except for fraud—insurance covers from £1 of claims.
Policy period: 18-24 months for general warranties (matching typical SPA warranty survival periods), 7 years for tax warranties (matching HMRC investigation periods).
Premium: 1-1.5% of policy limit for clean deals, higher for complex situations or sector-specific risks.
Example: £5 million policy limit = £50,000-£75,000 premium for straightforward transaction.
What W&I Insurance Actually Covers
W&I policies cover breach of warranties and indemnities in the SPA. The coverage is specific to transaction representations, not general business risks.
Covered warranty breaches:
Financial statement inaccuracies. Representations about turnover, EBITDA, assets, liabilities prove incorrect. Buyer discovers undisclosed liabilities, overstated revenues, or understated obligations.
Example: Warranty states “all liabilities disclosed in accounts.” Post-completion, buyer discovers £800,000 undisclosed tax liability. W&I insurance responds if this falls within covered warranties.
Intellectual property ownership issues. Warranty states company owns all IP used in business. Post-completion, third party claims IP infringement or disputed ownership.
W&I insurance covers the buyer’s losses from IP disputes arising from warranty breaches.
Undisclosed litigation or disputes. Warranty states no threatened litigation. Post-completion, customer or supplier claim emerges that predated completion but wasn’t disclosed.
Insurance covers buyer’s losses from these undisclosed matters.
Regulatory compliance breaches. Warranty states full regulatory compliance. Post-completion, regulatory investigation reveals historic non-compliance creating fines or remediation costs.
W&I insurance covers these losses subject to policy terms.
Customer contract misrepresentations. Warranty states customer contracts are on disclosed terms with no threatened cancellations. Post-completion, major customer cancels citing pre-completion issues.
Coverage depends on whether the customer threat predated completion (covered) or arose from post-completion events (not covered).
Tax liabilities. Separate tax warranties typically cover historic tax compliance. Post-completion HMRC assessments for underpaid tax, penalties, or interest are covered.
Tax coverage often has extended policy periods (7 years) and separate limits.
What Does D&O Insurance Actually Cover? →
Key W&I Insurance Exclusions
Like all insurance, W&I policies have exclusions defining what’s not covered.
Known breaches and disclosed matters. If warranties breach but the breach was disclosed in the disclosure letter, it’s not covered—disclosure eliminates warranty breach liability.
Insurers underwrite disclosed matters during policy placement. Some disclosed items can be “bought up” (coverage arranged despite disclosure) for additional premium if risk is acceptable.
Forward-looking projections and forecasts. W&I insurance covers historical facts, not future projections. Warranties about future performance, growth rates, or market conditions aren’t typically warranted or insured.
Buyer’s own due diligence findings. If buyer’s due diligence identifies issues but buyer proceeds anyway, those issues aren’t covered. The logic: buyer had actual knowledge, so reliance on warranties is negated.
This creates tension between thorough due diligence (which may discover issues eliminating coverage) and limited diligence (which protects insurance coverage but increases risk).
Criminal conduct and fraud. If warranty breaches result from deliberate fraud or criminal acts, coverage is excluded. But innocent sellers remain protected if one party committed fraud without others’ knowledge.
Pension scheme deficits. Pension liabilities are often excluded or limited in W&I policies due to complexity and uncertainty. Separate pension insurance may be required.
Environmental liabilities. Contamination, pollution, and environmental remediation are typically excluded or subject to separate environmental insurance.
Tax excluded by HMRC clearances. If specific tax matters received HMRC clearance pre-completion, those matters are excluded from tax warranty coverage (they’re resolved).
The W&I Claims Process
W&I claims follow structured processes different from standard insurance claims.
Step 1: Buyer discovers breach. Post-completion, buyer identifies facts suggesting warranty breach—undisclosed liabilities, IP disputes, regulatory issues.
Step 2: Notice to insurer. Buyer notifies W&I insurer of potential claim, providing details of alleged breach and estimated loss.
Most policies require notification within specific timeframes (30-90 days of discovery). Late notification can jeopardize coverage.
Step 3: Insurer investigation. Insurer assesses whether:
- The SPA contained relevant warranties
- The facts constitute breach of those warranties
- The breach was known/disclosed (excluded) or unknown (covered)
- Loss quantum is reasonable and causally linked to breach
Step 4: Seller involvement (or not). In buy-side policies, sellers are typically notified and may participate in the process (they have no financial exposure but reputational interest).
In sell-side policies, sellers coordinate directly with insurers as they’re the policyholders.
Step 5: Resolution. Insurer either:
- Accepts claim and pays (less retention/excess)
- Disputes claim and defends (if they believe no breach or loss isn’t covered)
- Settles for negotiated amount between full claim and zero
Timeline: W&I claims typically resolve faster than D&O claims (6-12 months vs 12-24 months) because they’re transaction-specific factual disputes rather than complex governance liability.
According to data from AIG, approximately 15-20% of W&I insurance policies result in claims, with average claims size ranging from £250,000 to £1.2 million depending on deal size and sector—demonstrating that W&I claims are relatively common and material enough to justify insurance costs.
When W&I Insurance Makes Commercial Sense
W&I insurance isn’t appropriate for all M&A deals. Clear use cases exist where it adds value versus situations where seller warranty retention is more efficient.
Strong candidates for W&I insurance:
Competitive auctions (£10m+ enterprise value). Buyers use W&I to enhance bids by offering sellers minimal warranty exposure. In competitive processes, this can be differentiating factor.
Founder/management exits. Founders selling businesses want clean exits without prolonged liability tail. W&I facilitates this, particularly important if founders are retiring or pursuing other ventures.
Private equity acquisitions. PE buyers routinely use buy-side W&I as standard acquisition infrastructure, viewing it as efficient risk transfer and improved deal certainty.
Multiple selling shareholders. When many sellers exist (employee shareholders, multiple founders, investor groups), coordinating warranty claims post-completion is complex. W&I eliminates this coordination burden.
Complex businesses with disclosure uncertainty. If due diligence is incomplete or business complexity creates disclosure uncertainty, W&I provides protection against unknown unknowns.
Weaker candidates for W&I insurance:
Small deals (<£5m enterprise value). W&I premium and underwriting costs are disproportionate. Seller warranties with standard limitations are more cost-effective.
Distressed sales. Insurers are reluctant to underwrite W&I for distressed businesses with known issues. Coverage is expensive or unavailable.
Management buyouts with ongoing seller involvement. If sellers remain involved post-completion, warranty claims against them are uncomfortable. But if they’re involved, they can remediate issues directly rather than insurance claims.
Clean, simple businesses with strong due diligence. If due diligence is comprehensive and no concerns emerge, warranty breach risk is low. Insurance may be unnecessary cost.
The Relationship Between W&I and D&O Insurance
W&I insurance and D&O insurance are complementary but distinct.
D&O covers: Ongoing director liability for management decisions, fiduciary duties, and governance throughout directors’ tenure.
W&I covers: Transaction-specific warranty breaches in M&A deals, typically for 18-24 months post-completion (longer for tax).
When both are relevant: Sellers need both D&O run-off coverage (protecting directors from pre-acquisition claims) and W&I coverage (protecting from warranty breach claims).
Buyers often require sellers to maintain D&O run-off coverage for 6-7 years post-acquisition. This protects former directors from claims arising from pre-acquisition period that emerge years later.
W&I insurance doesn’t replace D&O run-off—it covers different risks. Transaction documentation should address both:
- W&I insurance for warranty breaches
- D&O run-off for director liability claims
- Seller warranty caps and limitations
- Buyer indemnification obligations for ongoing director liability
The Bottom Line
Warranty and indemnity insurance UK M&A transactions use transfers warranty breach risk from selling shareholders to insurers, enabling clean exits for sellers and providing buyers with solvent counterparties for warranty claims.
W&I policies are typically structured with 10-30% of enterprise value limits for general warranties, 0.5-1% retention for buyers, and premiums of 1-1.5% of policy limits. Buy-side policies (buyer purchases, covers warranty breaches) dominate the UK market over sell-side structures.
W&I insurance covers breach of warranties in SPAs—financial misstatements, undisclosed liabilities, IP ownership issues, regulatory non-compliance, customer contract misrepresentations. It excludes known breaches, disclosed matters, forward-looking projections, and buyer’s own due diligence findings.
The insurance makes commercial sense for competitive auctions, founder exits, private equity acquisitions, multiple seller situations, and complex businesses. It’s less appropriate for small deals, distressed sales, or clean simple businesses with low warranty breach risk.
W&I complements but doesn’t replace D&O insurance—sellers need both W&I coverage for transaction warranties and D&O run-off protection for ongoing director liability from pre-acquisition period.
For founders selling businesses, W&I insurance facilitates clean exits by eliminating prolonged warranty exposure that could reach into hundreds of thousands or millions in liability. For buyers, it provides certainty of financial recourse without pursuing individual sellers who may be judgment-proof or difficult to locate.
The transaction costs—£50,000-£150,000 premium for typical mid-market deals—are modest relative to deal values and the protection provided, which is why W&I has transitioned from occasional deal enhancement to standard M&A infrastructure for UK transactions over £10-20 million enterprise value.
Simplify Stream provides educational content about business insurance for UK companies, especially those with high-growth business models that require specialist insurance market knowledge. We don’t sell policies or provide regulated advice—just clear explanations from people who’ve worked on the underwriting and broking side.
External Resources
Marsh Commercial – Search for the latest W&I Insurance Market Report. https://www.marsh.com/uk/insights/research/warranty-and-indemnity-insurance-market-report.html. Global insurance broker and risk adviser, publishes authoritative market research on transactional risk insurance trends.
AIG – Search for transaction claims data. https://www.aig.co.uk/business/insurance/financial-lines/transactional-risk-insurance. Major international insurer providing transactional risk insurance, publishes claims data and market insights.
Simplify Stream provides educational content about business insurance for UK companies, especially those with high growth business models that require specialist insurance market knowledge. We don't sell policies or provide regulated advice, just clear explanations from people who've worked on the underwriting and broking side.
