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.
The detailed author article by Philipp von Braunschweig in the new FYB 2022 can answer many more questions for you https://www.fyb.de/shop/.