Insuring against risky deals

Both sellers and buyers could enter into a transaction in a more relaxed frame of mind by utilising Warranty and Indemnity insurance, according to the latest webinar from HOSPA; Navigating Risk in UK Hotel Transactions, supported by Howden.

Attendees heard from Jamie Weber, senior associate at Howden M&A who described W&I insurance as “a tool for transferring liability from the sellers to the insurance market in an M&A context”. He noted that policies could respond to breaches of warranties or claims under a tax covenant, allowing buyers to claim against the insurer rather than directly against the seller.

The benefits of W&I insurance applied to both sides of a transaction. For sellers, a key advantage was the ability to achieve a clean exit, reducing their ongoing liability after completion. For buyers, the policy provided access to an insurer and could reduce the need to pursue sellers, management teams or joint-venture partners if a claim subsequently arose. Weber also highlighted the potential for W&I to provide broader protection than would otherwise be available through the transaction documents.

A theme of the webinar was the importance of understanding what W&I did and did not cover. Weber emphasised that the product was designed for unknown risks rather than problems that have already been identified during due diligence. He said: “The W&I is there for your true unknowns, for what you don't know about, and that's what ultimately will be covered under the W&I insurance policy.”

Consequently, W&I insurance did not replace proper legal, financial and tax due diligence. Insurers relied on these investigations, as well as transaction disclosures, when assessing the risks they were prepared to insure. Known issues and matters already disclosed would generally be excluded from coverage.

Weber also addressed risks relevant to hotel transactions, including property condition, cyber and data protection, employment, material contracts and inventory. Cyber risk was highlighted as an increasingly important area, with Weber noting that claims arising from cyber breaches had increased across the industry.

Weber drew attention to the financial structure of W&I policies, with policy limits generally linked to transaction value, with approximately 20% identified as a typical average. Hotel transactions frequently had a nil deductible, although larger deals could involve a self-insured element. Premiums were calculated as a percentage of the insured amount and can vary depending on the nature and size of the transaction.

Weber also discussed claims experience. He explained that around 7% of W&I policies received at least one notification, while stressing that a notification does not necessarily become a successful claim. The most common areas of breach included financial statements, tax, material contracts and compliance with laws. Hospitality examples discussed included licensing issues, employment and social-security matters, fire safety, unpaid invoices, tax issues and rights-of-way disputes.

In conclusion, Weber told attendees that, to benefit from the potential of W&I insurance it was important to understand its scope. Effectiveness depended on appropriate due diligence, early engagement and a clear distinction between identified risks and the unknown risks the policy was designed to address.