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Warranty & indemnity (“W&I”) insurances are becoming increasingly popular in Europe. Even though W&I insurances are still not the norm in Belgium, they are becoming more prevalent and in particular for transactions with a deal value exceeding 100 million that are managed through an auction process or where it concerns private equity firms seeking a clean exit.
Even though the concept is not often used in small and medium-sized transactions in part because of the costs involved, it could be interesting for both buyers and sellers to investigate the upside of a W&I insurance in a specific deal. Moreover, given the more frequent use of W&I insurances, this segment of insurances is becoming increasingly competitive and as more and more insurance companies offer W&I insurance products, this will have a positive outcome on the price, the underwriting process and the time schedule. These evolutions will most definitely be advantageous for smaller and mid-size transactions.
A W&I insurance can bring a lot of comfort to both seller and buyer. For example, for those issues covered by the W&I insurance, the seller will no longer be the financially liable party and as such there will be less need for a seller to provide financial guarantees. Also, in rollover equity transactions buyers are usually more reluctant to claim from a seller since it could damage their cooperation (which could finally have a negative impact on the target), this type of restraint will be less of an issue if a W&I insurance is in place. Nevertheless, a W&I insurance does not completely replace the indemnity and guarantee mechanisms included in the SPA due to the many exclusions and limitations that a W&I insurance puts in place.
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