Sell-side policies - a potential exclusion

15 November 2018

The majority of warranty and indemnity insurance policies that JLT M&A place globally are in the name of the buyer rather than the seller

There are a number of reasons why buy-side insurance is the more popular of the two. It can enable a sell clean exit, i.e. allowing the seller to limit its liability in the sale and purchase agreement to a nominal level and requiring the buyer to have the insurance policy as its primary source of recourse. It also means that the buyer can make a claim against an A rated insurer instead of its future partner (in the case of a merger) or distant, disappearing ex-shareholders.

There are; however, benefits to the seller of having a policy in its own name. The seller will know exactly what is and isn’t covered under its policy and is not required to ask the buyer to view the document. It also has the insurer ready to assist it if a buyer does bring a claim for a breach, and the insurance policy covers the seller’s legal fees that are in connection with the breach. The insurer has the incentive to defend the seller’s potential breach and will work with it during the process of the claim. For an individual or family owned company, a sell-side policy may be the preferred option. It should be noted that there are differences between the two – buy-side and sell-side – and a potential exclusion that should be avoided.

The article will focus on this potential exclusion. W&I policies are designed to cover unknown warranty breaches. On a buy-side policy, this covers breaches of warranties that the buyer was unaware of when the deal signed. Likewise, a sell-side policy covers warranty breaches that the seller itself was unaware of at the date the warranty was given. Before the W&I policy incepts, individuals representing the policyholder are required to sign no-claims declarations often referred to as NCDs. The NCD states that the individual does not have knowledge of a breach of any of the warranties covered in the policy. Effectively this is attempting to prevent an insured from making a claim for something that it was already aware of.

Shortening this, W&I policies are for unknown warranty breaches and individuals on behalf of the insured have to state, at inception, that they are not aware of any undisclosed breaches. In a W&I insurance policy, the sale and purchase agreement warranties are listed as either: covered, partially covered or excluded. A partially covered warranty is a warranty that is amended for the purpose of the policy and covered on that basis. A common amendment is the addition of a knowledge qualifier and this is the potential exclusion which should be avoided. Using an example:

Warranty – there is no on-going litigation against the target company or its subsidiary entities.

Partially covered policy warranty – there is no on-going litigation against the target company or, so far as the seller is aware, its subsidiary entities.

For the subsidiary company element of the amended warranty to be breached, the seller would need to have knowledge of on-going litigation in its target company subsidiaries that it failed to disclose. In a sell-side policy, if the seller was to attempt to make a claim for a breach of this warranty, the insurer would potentially decline. It could be argued that:

  1. The amended warranty requires there to be knowledge of on-going litigation in a subsidiary that wasn’t disclosed
  2. The NCD that the individuals signed on behalf of the seller states that they have no knowledge of a breach that has not been disclosed
  3. The individuals on behalf of the seller therefore either: (i) had knowledge of a breach that they wrongly did not state in the NCD or (ii) the individuals did not have knowledge of any litigation in the subsidiary entity and the amended warranty as such has not been breached.

The NCD and the breached warranty could be argued to be not compatible. The warranty requires that the breach was a known issue; the NCD requires that individuals within the seller had no knowledge of a breach for a claim to be payable.

There are arguments that complicate this scenario and drafting points that need to be considered. Some of these arguments are included here: in the sale and purchase agreement, who are the parties giving the warranties and what is their relation to the seller? In the policy, who signed the NCD and what is their relation to the insured? In the NCD, does it state that the individuals have no knowledge of a breach or does it go further and include potential breaches or facts and circumstances that could lead to a breach? These questions could be used for or against a declined claim; however, it is arguable that it is best to try to avoid them from the start.

The ideal position would be to push an insurer take full coverage; after all, the seller was comfortable with the warranty as it stands in the SPA. Alternatively, a different qualification could be used – in the example above we could argue for “there is no on-going litigation against the target company or litigation with a potential value of X against its subsidiary entities”.

It is important that sell-side policyholders are aware that there are differences from buy-side policies. On a sell side policy, there is potentially very little cover for the seller if an insurer deems a warranty limited by awareness for the purposes of the policy. This brief article outlines one potential difference but there are others that should also be considered. A policyholder should be confident that their broker knows and explains these differences. This will prevent future difficulties that could result in successful claims being paid.

Thank you to Hayley Tennant for her guidance on this article.

The article should not be taken as legal advice or as a substitute for reading your policy in full to understand your legal position.

For further information, please contact please contact James Kay, Regional Assistant Director at