Warranty & indemnity (W&I) insurance, better known in the US as representations and warranties (R&W) insurance, has seen sustained growth over the past decade.
The development of its terms and coverage has differed among jurisdictions, influenced by the M&A practice in each country and the variation in underlying legal principles.
For example, in the UK, W&I insurers are seeing an increase in “US style coverage” requests as American investors and US private equity buyers look to apply capital to European assets.
As is common in UK acquisition agreements, certain representations in a US purchase agreement will include materiality and/or material adverse change qualifications. In the US, it is not unusual for a buyer in a US transaction to agree to a “double materiality scrape” in the purchase agreement.
In the US, representations are typically given on an indemnity basis. This is not the typical position in the UK where loss is awarded on a damages basis.
Other, more insured-friendly coverage positions considered standard in the US include non-disclosure of the data room and due diligence reports, no warranty spreadsheets, and no de minimis limitation on claims which would be mirrored in the R&W policy.
UK W&I policies replicate the market-standard position under English law purchase agreements whereby the data room and matters fairly disclosed in the due diligence reports are generally disclosed against the warranties.
In the US, however, where it is less common to see general disclosure of the data room, neither it nor the due diligence reports are generally disclosed against the policy.
In the UK it is typical for policies to include a catalogue of all insured warranties and their corresponding coverage position in which most if not all warranties will be ‘covered’. The US has no such spreadsheet, instead only uninsurable specific representations and warranties will be carved out from the definition of ‘breach’.
These differences in coverage between the US and the UK ultimately translates to differences in price. The premium for R&W insurance in the US will generally sit within the range of 3-4% of the limit of liability. This is higher than the premiums in the UK which will typically be 1-2.5% for non-real estate transactions.
In terms of policy excess, the level on US R&W policies will typically be 1.5-2% of the enterprise value of the target company as compared to the 1% expectations in the UK.