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Warranty and Indemnity Insurance and COVID-19

09 June 2020 #Commercial #Corporate

Warranty and indemnity Insurance in share purchase transactions is not new and has been offered in the insurance market place for some time.

In a share purchase transaction, it is usual for the seller to enter into the contract based on warranties and representations about the business.  These can be extensive and relate to all facets of the business, including financial performance, customer contracts, employees, litigation and ownership and condition of assets, stock and other materials.

If the warranties are breached, then a buyer has the ability to sue for losses suffered as a breach of contract or, in some instances through the Tort of misrepresentation.

A seller will attempt to limit their liability through the purchase agreement and also through what is known as a disclosure exercise.

Warranty and indemnity insurance protects the insured from financial losses arising due to unanticipated breaches of the contractual warranties and indemnities. It is possible for both a buyer and a seller to obtain such insurance, however, it is fair to say that buyers are the more prevalent.

There are a number of benefits of obtaining such cover, which include:

  • Preservation of the transaction price – if the risk is insured, there is no need to negotiate a price reduction;
  • Uncertainties around potential tax penalties can be guarded against; and
  • Transactions can be negotiated quicker – less time debating the inclusion of certain warranties and / or indemnities.

The insurance is obtained through a broker, who having understood the transaction will go to market and find a suitable insurer.  Usually the insurer will undertake their own due diligence exercise and then terms are offered and a premium calculated – generally this is a one-off amount.

Transactions completed 3 months prior to lock down, let alone those completed 18 months ago would have been oblivious to the potential impact on operational performance caused by COVID-19.  Whilst some businesses have been forced to close, others have lost key employees because of the pandemic, some have lost revenues because of the insolvency of customers or insolvency in the supply chain, others have lost out to cyber security breaches, which have may have been caused because of the impact that working form home restrictions may have placed on IT security.

Whilst many transactions have been completed without the benefit of warranty and indemnity insurance, and buyers and sellers will be trying to agree who should bear the cost, many will be looking at the detailed wording of their insurance policies and trying to understand if they are covered.

A number of insurers built in very broad exclusions to COVID-19 limiting the application of the protection where losses arose or resulted from not just the virus or any mutation of it, but also losses arising as a result of restricted operations brought in by restrictions from governments or regulatory bodies.

As time has progressed, a number of insurers have re-considered the application of broad exclusions and tailored their underwriting criteria which has had an impact on pricing.

The net result is that whilst attractive for both seller and buyer, the appetite for the purchase of such cover has been limited due to transactions involving significant deal values – the premium is considered prohibitively expensive.

Notwithstanding the pricing, this has become a product that has seen increased demand over the last ten years.  With the increases in premium brought about by COVID-19, it remains to be seen as to whether or not this demand will continue.

Clarkslegal, specialist Commercial lawyers in London, Reading and throughout the Thames Valley.
For further information about this or any other Commercial matter please contact Clarkslegal's commercial team by email at by telephone 020 7539 8000 (London office), 0118 958 5321 (Reading office) or by completing the form on this page.
This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full General Notices on our website.

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Stuart Mullins

Stuart Mullins

T: 0118 960 4672
M: 0777 630 5578


Commercial team
+44 (0)118 958 5321