Trends in the S&I Insurance Market — Implications for M&A Practice

Typi­cally, S&I insu­rance is purcha­sed by the buyer, meaning that the insurer agrees to indem­nify the buyer for the seller’s warran­ties and indem­ni­ties under theSale and Puch­ase Agree­ment (SPA). In bidding proces­ses, the S&I insu­rance solu­tion is usually alre­ady prepared by the seller. The aim is to exclude the seller’s own liability.

From the buyer’s point of view, the complete exclu­sion of the seller’s own liabi­lity is not without problems, because the elimi­na­tion of the liabi­lity risk may have a detri­men­tal effect on the dili­gence of some sellers when issuing guaran­tees and compi­ling the contract attach­ments. After all, the insu­rance solu­tion has the advan­tage for the buyer that he has a (usually) solvent debtor for his guaran­tee and indem­nity claims and conten­tious nego­tia­ti­ons about purchase price reten­ti­ons, guaran­tees and escrows usually become super­fluous. In the current market envi­ron­ment, which can still be descri­bed as a “seller’s market”, it has in any case become stan­dard prac­tice in bidding proce­du­res for sellers to insist from the outset on full coverage of the tran­sac­tion by S&I insu­rance exclu­ding their own liability.

Espe­ci­ally recently, it can be obser­ved that sellers some­ti­mes specify narrow loss concepts and very short limi­ta­tion peri­ods, as S&I insu­r­ers are now able to offer policy enhance­ments for this as well. In this case, the Insurer is prepared to cover warran­ties even beyond the peri­ods provi­ded for in the SPA (until the expiry of a longer period agreed in the insu­rance policy) and also to pay for conse­quen­tial dama­ges and loss of profit excluded in the SPA. Howe­ver, these enhance­ments are usually asso­cia­ted with not incon­sidera­ble premium surchar­ges, so that the reason­ab­leness of shor­tening limi­ta­tion peri­ods and narro­wing the defi­ni­tion of damage in the SPA must be weig­hed up by the parties in each indi­vi­dual case.

In summary, it can be said that in the current market envi­ron­ment W&I insu­rance can more than ever be an inex­pen­sive, highly stan­dar­di­zed and quick solu­tion that greatly shor­tens the previously common lawyer nego­tia­tion batt­les on guaran­tees and liabi­li­ties, mini­mi­zes the seller’s risks and at the same time makes guaran­tees and secu­rity reten­ti­ons super­fluous, since the buyer has a (usually) finan­ci­ally strong debtor in the W&I insurer. In addi­tion, strong compe­ti­tion among S&I provi­ders has led to crea­tive solu­ti­ons for the many remai­ning problem areas as well.

About Philip of Brunswick
Part­ner at Poellath (www.pplaw.com) and has specia­li­zed in buy-out tran­sac­tions for private equity funds, entre­pre­neurs and invest­ment compa­nies for over 25 years. In the current JUVE hand­book, he is listed for the second time in a row among the 28 “leading advi­sors” for private equity tran­sac­tions in Germany. In addi­tion to his work as a lawyer, he is a prac­tice lectu­rer and Chair­man of the Execu­tive Board of the Master’s program in Busi­ness Law at the Univer­sity of Münster. 

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