Warranty & Indemnity Insurance: How It Works and When It Makes Sense

Warranty and indemnity (W&I) insurance has become a standard feature of mid-market and larger M&A transactions in Australia. Once seen as exotic, it is now routine. But it is not free, it is not always appropriate, and using it well requires careful planning. Here is a practical guide.

What is W**&**I insurance?

W&I insurance is a policy that covers losses arising from a breach of warranties or indemnities given in a sale and purchase agreement. The policyholder (typically the buyer, sometimes the seller) can claim against the insurer instead of (or in addition to) the seller.

In a buyer-side policy (the most common form), the buyer holds the policy and claims against the insurer if a warranty turns out to be untrue.

What does it cover?

A typical W&I policy covers:

• Breaches of warranties given in the sale agreement
• Specific tax indemnities
• Some general indemnities (subject to negotiation)

Standard policy exclusions include:

• Forward-looking statements
• Known issues identified in due diligence
• Matters disclosed in the disclosure letter
• Specific risks (such as known environmental contamination) for which standalone cover may be sought separately
• Fraud (which the seller remains liable for in any event)

When does it make sense?

W&I insurance is most useful when:

Sellers want a clean exit. Private equity sellers and selling founders often want their proceeds without continuing exposure to warranty claims. W&I lets them sell with minimal residual liability.

The buyer wants a deeper recourse pool. A solvent insurer with a high policy limit is a more reliable counterparty than an individual seller or a small selling group.

There are multiple sellers. Coordinating warranty claims across multiple sellers is administratively complex. Insurance simplifies recovery.

The deal is mid-to-large. Below a certain transaction size, insurance becomes uneconomic. Above that threshold, the cost is typically a small percentage of deal value.

W&I is less appropriate when:

• The deal is small (under $5–10 million in transaction value)
• The seller is a strategic corporate with a strong balance sheet
• The buyer has already discounted the price for known risks
• The premium is disproportionate to the cover provided

Cost

Premiums in Australia typically range from 0.7% to 1.5% of policy limit, plus underwriting fees and stamp duty. The buyer usually pays, although the cost is often factored into price negotiations.

The policy limit is typically 20–40% of enterprise value, with deductibles and de minimis thresholds aligned with the sale agreement.

Process

Putting W&I in place runs in parallel with the deal:

• Quote phase: A broker obtains indicative quotes from underwriters based on a teaser pack including deal summary and financial information.
• Underwriting: Once a preferred insurer is selected, the insurer reviews due diligence reports and the draft sale agreement.
• Underwriting calls: The insurer holds calls with deal team members and advisers to test the warranties and identify specific exclusions.
• Policy drafting: The insurer issues a policy that aligns with the sale agreement warranties.
• Binding: The policy is bound at signing or completion.

The buyer's legal team is heavily involved in coordinating with the insurer, particularly around the warranties package and the disclosure regime.

What buyers should know

Disclosure matters. What is disclosed in the disclosure letter is generally excluded from cover. Sellers and buyers therefore have aligned interest in keeping disclosure narrow, but the policy underwriter will scrutinise this.

Known matters are excluded. Anything known to the buyer (typically through due diligence) before signing is excluded.

Sub-limits and exclusions. Specific sub-limits often apply to tax warranties, environmental matters, employee underpayment claims, and other categories.

Title warranties. These are often given a longer survival period and higher cover than general business warranties.

What sellers should know

Cleaner exit. With proper W&I, sellers can negotiate down their direct exposure to a token cap (often $1).

Disclosure remains important. Sellers still need a robust disclosure process to support the warranties.

Fraud remains uninsurable. Sellers cannot escape liability for fraud through W&I. Disclose accurately.

Common pitfalls

• Engaging the insurance broker too late in the process
• Drafting the warranties first and then trying to retrofit insurance, rather than designing the warranties with insurance in mind
• Underestimating the time and information required for underwriting
• Inadequate disclosure schedules that create coverage gaps
• Failing to align deductibles and limitations across the policy and the sale agreement

How Luma Legal can help

We work with W&I brokers and insurers regularly, and we structure deals to make insurance work. We negotiate the warranty package, manage the disclosure process, coordinate with the insurer, and ensure the policy and the sale agreement work as a coherent whole.