Professionals

Transactional
Liability

Transactional Liability is a term which covers a broad spectrum of insurable risks generally connected with a business merger, acquisition or disposal.

With the sale of a company it is common for the seller to be asked to provide warranties to the buyer on a broad range of matters – such as taxation, litigation, intellectual property, employment, pensions and other commercial matters.

The buyer will typically want any warranties and/or tax covenants in the sale and purchase agreement (SPA) to be as extensive and unqualified as possible, giving it the best chance of making a claim should the need arise. The seller(s) will typically want to limit any warranties – giving it the cleanest possible exit. The seller may also not want any sale proceeds deferred, retained or held in escrow.

These differences between the parties’ expectations could easily result in a deal not proceeding. Warranty & Indemnity (“W&I”) insurance is a specialist insurance policy which is increasingly being used in M&A deals to bridge that gap. It transfers the risks from the transacting parties to an insurer.

Policies can be purchased by either the buyer or the seller – dependent upon where the liability rests in the transaction. The need often arises during sale preparations when the seller is not prepared to indemnify the buyer against an unfavourable outcome and the buyer is not prepared to take on the long-term liability.

It is also possible to arrange separate policies to specifically identified risks, such as a potential tax liability or other contingent risks