Warranty and Indemnity (W&I) insurance is an insurance product that transfers the financial risk of representations and warranty breaches in a purchase agreement from the seller (or buyer) to an insurer. It has become a standard feature of European mid-market M&A transactions, enabling sellers to provide a clean exit (escrow-free, with minimal retained liability) while giving buyers recourse against an insurer with deep pockets rather than an individual seller whose proceeds may be difficult to recover.

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In a buy-side W&I policy (the most common structure), the buyer takes out the policy directly with the insurer and can claim directly for losses arising from warranty breaches — without needing to claim against the seller first. The seller's retained liability under the SPA is then limited to fraud only. Premiums typically range from 0.8 to 1.5% of the insured limit for mid-market European transactions.

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W&I insurance is underwritten based on the quality of due diligence: underwriters review the financial, legal and tax due diligence reports and exclude from coverage any known risks (disclosed items, matters identified during DD). Financial due diligence quality is therefore directly linked to the breadth and cost of W&I coverage obtainable.

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Example: in the acquisition of a Swiss professional services firm for CHF 22.0M, the buyer obtains buy-side W&I insurance with a limit of CHF 6.6M (30% of EV), retention of CHF 220K (1% of EV), and a premium of CHF 99K (1.5% of limit × CHF 6.6M). The seller's retained SPA liability is capped at CHF 220K (fraud only). Escrow is eliminated — simplifying the transaction and accelerating closing.

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At Hectelion, our financial due diligence mandates are prepared to W&I insurance standards, maximising the coverage available to acquirers in Franco-Swiss transactions.