On a sale of shares, typically the seller will provide warranties and, where there is a perceived higher risk, indemnities to the buyer on a broad range of issues including:

• title to the shares;

• tax;

• property;

• employees;

• intellectual property;

• disputes and litigation; and

• other commercial matters.


A warranty is an assurance or promise in a contract, the breach of which may give rise to a claim for damages.

An indemnity, on the other hand, is an undertaking by one person to meet a specific potential legal liability of another. An indemnity entitles the person indemnified to a payment if the event giving rise to the indemnity takes place.

Warranty and Indemnity Insurance (“W&I Insurance”) provides protection to the seller, or the buyer, against any breaches of warranty, or claims under an indemnity, that may arise.

Warranties, and particularly indemnities, are often found to be the most contended and time consuming area of negotiation with respect to the legal documents. Unsurprisingly, the buyer will want the scope of warranties to be as wide as possible, whereas the seller will want to limit the warranties as much as possible. The negotiation of any proposed indemnities will normally come down to each party’s perception of the identified risk and the balance of bargaining power.

W&I Insurance can be purchased either by the seller as a “seller-side policy”, or more commonly by the buyer as “buyer-side policy”.

Buyer-side Insurance

The concept of the buyer-side insurance policy arose as a result of sellers either being unable or unwilling to provide the level of cover sought by the buyer. The aim of the buyer’s insurance policy is to protect itself over and above the seller’s contractual limit on liability.

Seller-side Insurance

Seller-side insurance policies are less common than buyer-side policies and are designed to insure the seller in the case of a valid claim brought by the buyer.

The purpose of either a buyer-side policy or a seller-side policy is for the insurer to take, at a price, some of the risk for a breach of warranty or indemnity. The insurer will need to understand the risks involved and, as such, the insurer will need to familiarise itself with the structure and mechanics of the deal, due diligence and transaction documents.

As with all insurance policies, certain matters will be excluded from the cover.

Common exclusions for W&I Insurance include:

  • liabilities arising out of anything disclosed or otherwise in the knowledge of the insured parties (note: as with all matters disclosed, if the matter disclosed is significant, this should be reflected in the terms of the transaction, as it would be unreasonable for the insured party to expect an insurer to cover such a risk);
  • changes to transaction agreements without prior approval of insurer (note: review and approval of the transaction documents by the insurer should be factored into the transaction timetable); and
  • fraud and deliberate non-disclosure (note for sellers: this will normally also invalidate any liability caps agreed in the share purchase agreement).

The question of who will meet the cost of the insurance premium and insurance premium tax is dependent upon the bargaining power of the parties. It would be unusual for a buyer to pay for seller-side insurance, however it is far more common for a seller to meet the cost of buyer-side insurance. This is often included as part of a negotiation as to the seller’s total liability limitations.

The seller-side insurance might be of particular interest to passive shareholders, i.e. those who own an interest in the company but who are not involved in its management, who are bound by warranties and indemnities to the same extent as active shareholders.

For more information please contact Paul Forsyth, Associate Solicitor in the Corporate Commercial department: paul.forsyth@ellisonssolicitors.com

Original article: http://www.lexology.com