The use of warranty and indemnity (W&I) insurance reached record levels in the first half of 2024, with 1,540 policies placed and an increase in claims and payouts, according to a market study by HWF Partners.
W&I insurance protects parties in mergers and acquisitions (M&A) transactions from financial loss due to breaches of warranties and certain indemnities provided by the seller in a sale and purchase agreement. For example, it can cover losses if the acquired company underpaid taxes, failed to disclose obligations, or had property ownership issues.
HWF’s study, based on data from 22 European insurers that have written 15,080 W&I policies since 2016, found claims were made on 11.64% of policies, with larger deals (over £1 billion) seeing an 18.58% claim notification rate. Ultimately, claims were paid out on 4.32% of policies during the review period.
Another key takeaway from the report is the speed at which claims are settled. A quarter of successful claims were paid within six months, and 72.56% were settled within 18 months. W&I insurance provides an alternative to uninsured transactions, where claims would typically be made against sellers. In such situations, it is generally acknowledged that claims would be unlikely to be resolved within these relatively short timeframes.
The report also offers practical insights for W&I insurance users. For instance, subrogation—the ability of an insurer to pursue a seller for repayment if the seller acted fraudulently—occurred in just 1.85% of claims where there was a payout to an insured, suggesting that in practice, the likelihood of pursuing sellers is limited.
David Wall, Managing Director and author of the HWF Study, commented, “We’ve seen claim numbers increase rapidly over the last 12 months and have been involved in substantial settlements on behalf of our clients.
“Policies frequently cost less than 1% of the maximum payout limit, and the recovery rate is material for something designed for unpredictable circumstances, with claims paid out on over 4% of policies. That flow of capital back to insured parties isn’t showing any sign of slowing down.
“It’s vital that all parties involved in M&A transactions can have confidence in a W&I insurance product. Historically there’s been limited visibility on claims in our market, so it was important to us to lead on this report and give clients an objective set of data that should give comfort in using W&I.”
