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18 March 2019 / article

Warranty & Indemnity insurance for real estate transactions

The warranty & indemnity insurance (W&I insurance) is regularly used in the M&A practice to cover the warranties of the seller in share purchase agreements.

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In recent years, the use of the W&I insurance has become more popular in the real estate practice. The W&I insurance is not only used in share deals, where the shares of the entity holding the real estate are sold, but also in asset deals. The W&I insurance can be quite useful to make the sales process proceed more efficiently and to facilitate a clean exit for the seller.

Many sellers of real estate are reluctant to provide warranties in respect of the real estate sold. Especially in the current sellers’ market, with the corresponding "as is, where is” transactions, the set of warranties the seller is prepared to give is minimal. Although purchasers are usually aware of this, the expectations about the warranties in the sale and purchase agreement vary regularly. The W&I insurance may be a good alternative in such case.

The current providers of W&I insurances offer insurance policies where the insurance can cover almost every possible warranty of the seller, like (among other things) warranties in respect of the title to the property, the rental situation and the disclosed information. The standard exclusion in the policies nowadays regard warranties with respect to the construction and environmental condition of the real estate. However, these warranties are usually excluded by sellers in an "as is, where is” transaction as well.

The W&I-insurer would like to have access to the data room and review the due diligence reports of the purchaser prior to effecting the policy. Information and issues that are known to the purchaser from its due diligence will limit the cover under the warranties. This does not differ from the usual liability of a seller, since the sale and purchase agreement (usually) includes that the seller is not liable for matters that were already known to the purchaser.

The W&I insurance policy is taken out by the purchaser, since the purchaser is the party who would like to rely on the warranties in the future. This does not mean, however, that only the purchaser may initiate the W&I insurance and/or has to pay the premiums in respect thereof.

A seller could, already before the real estate is offered for sale, inform the potential purchasers that it only is prepared to give warranties by means of a W&I insurance, whether or not in full or in part at the expense of the purchaser. This way, the seller will prevent lengthy discussions on warranties and directly determines to limit its liability after the transfer of the property. In such case the purchaser and its legal adviser will discuss the extent of the warranties and the limitations of liability with the insurer instead of the seller. The limitations of liability in the W&I insurance policy do, for that matter, not have to be the same as the restrictions in the sale and purchase agreement; the wording of the policy of the W&I insurance will prevail in case of a claim against the insurer.

The amount of the premium will depend on the type of warranties and the limitations of liability. It goes without saying that the premium will become higher when the level and duration of the liability of the insurer increases. Although the premiums – especially in view of the current purchase prices – are reasonably affordable, you pay a relatively high price for the coverage of title warranties. One could choose to leave the coverage of the title warranties out of the policy to lower the premium. Since parties are able to check the public registers for Dutch real estate, sellers will be more prepared to provide title warranties and purchasers are usually prepared to rely on these.

In conclusion, if a seller wants to limit its liability and/or parties want to speed up the negotiation process, the W&I insurance can absolutely contribute to the result. The only price for this will be the corresponding premium, but the level thereof does usually not form an obstacle for parties to take out the W&I insurance.