Warranty and Indemnity Insurance

Warranty and indemnity insurance covers losses from breached warranties in the purchase agreement. If a seller's assurance later turns out to be false, the insurance steps in. This helps reduce disputes over warranties between buyer and seller. The policy is usually taken out on the buyer side, which then claims directly against the insurer. The seller's liability in the agreement is reduced to a nominal amount in exchange. Cover is set as a share of the price, the premium is calculated as a percentage of cover, and a retention applies.

Proper due diligence is a precondition, because the insurer only assumes risks that were actually examined. Known matters, items in the disclosure letter, tax structuring, environmental contamination and forward-looking statements are regularly excluded and must therefore still be covered through indemnities and holdbacks. The practical benefit for the seller is a clean exit without a long liability overhang, which matters particularly to funds wanting to distribute proceeds to their investors and to private individuals who do not want their assets tied up. For the buyer the policy replaces the seller's creditworthiness with an insurer's.

Besides premium and retention, costs include the insurer's underwriting review. The policy is no substitute for careful diligence but rather secures its outcome.

Note: This explanation is for general information only and does not constitute legal advice. The legal position depends on the individual case and may change with new legislation or case law. For a binding assessment, please consult a qualified lawyer.