W&I insurance supports the risk management of real estate transactions
The volume of real estate transactions keeps increasing despite the exceptional circumstances, but in this changing and unpredictable global situation risk management plays an even more crucial role when real estate business operators assess sale and purchase processes. In transactions, both parties aim to limit the risks related to the transaction to the best of their abilities – the seller with means such as limitations of liability in the sale and purchase agreement and the buyer with a due diligence review that is as extensive as possible.
W&I insurance is a tool for both the seller and the buyer to manage the risks related to the transaction, and in recent years the use of the insurance in real estate transactions has increased clearly. However, W&I insurance still raises a lot of questions. The main ones are what the insurance is, which benefits it offers and which practical measures the policyholder needs to take if they want to insure a transaction.
W&I insurance in a nutshell
W&I insurance means warranties and indemnities insurance. At times the insurance is also called transaction insurance. As the name indicates, W&I insurance insures the seller’s liability for the warranties the seller has given in the sale and purchase agreement in relation to the object of sale.
On one hand, the purpose of W&I insurance is that if the buyer notices that a seller’s warranty under the sale and purchase agreement has been breached, the buyer can make the claim for damages due to the breach of the warranty directly to the insurance company. On the other hand, the seller avoids discussing the breach of the warranty with the buyer and the costs arising from the possible liability for damages due to the breach. In its basic form, W&I insurance covers all of the seller’s warranties under the sale and purchase agreement. The seller may only end up being liable for damages instead of the insurance company (or having to compensate the insurance company) in situations where the breach of a warranty results from the seller’s wilful misconduct or gross negligence.
W&I insurance is usually taken out by the buyer, and it is usually bought through an insurance broker. Brokers collect basic information about the object of sale and purchase, its value and the structure of the transaction and request to see the draft of the sale and purchase agreement. Based on this information, brokers request offers of insurance terms and of the price for the transaction on behalf of the buyer from insurers that distribute transaction insurance policies. Brokers are also a valuable help in evaluating the offers since they have more experience and thus a more in-depth view on which insurers and insurance policies could be suitable for the transaction in question.
Does your transaction need W&I insurance?
W&I insurance is suitable for transactions of different types and sizes so when considering an insurance policy, the value of the transaction in euros or the type of the object of sale and purchase alone do not indicate whether the transaction is suitable to be insured or not. W&I insurance is flexible and can even be applied to more challenging situations in the transaction structure. For example, even if there is a long period of time between the signing and the completion, insurance brokers may still find suitable solutions. In addition, the price of the insurance policy is tied to the sum insured, which means that transactions with smaller value are also worth insuring. The biggest challenge for the insurability of a transaction is usually that the buyer does not want to conduct an extensive due diligence review of the object of sale– the insurers’ key requirement when assessing insurability is expressly an extensive and thorough due diligence review.
It is in the best interests of the buyer to take out an insurance policy particularly in situations where the fund or other entity acting as the seller will be dissolved after the transaction, which means that after the completion of the transaction there will no longer be a seller party to which the buyer can make claims about breaches of the seller’s warranties. Taking out W&I insurance is generally in the best interests of the seller in all situations and particularly when the buyer pays the costs of the insurance policy and when taking into account that the seller’s warranties may be more extensive in insured than in uninsured transactions. Insuring a transaction can in turn help the seller to get a better price for the object of sale and purchase.
Practical tips for taking out W&I insurance
If you are insuring a transaction for the first time, here is a list of measures that in our experience are the most important steps:
- Contact an insurance broker at an early stage and be prepared for the fact that brokers need information on the transaction, such as information on the parties and the advisers of the parties, the value of the transaction, the schedule, information on whether the signing and the implementation take place separately, any due diligence reviews conducted by the seller, information memorandums about the object and other available material.
- Your own legal adviser should be included in the discussion at an early stage particularly because law firms have experience of insured transactions and great direct contact with insurance brokers.
- Taking out an insurance policy requires that different advisers conduct an extensive due diligence review (technical, environmental, financial, legal and tax review), which should be started in sufficient time before signing the sale and purchase agreement.
- Prepare to answer the insurer’s questions both in writing and during the interview scheduled with the insurer, called the underwriting call.