What the policy does
Warranty and indemnity insurance covers loss arising from a breach of the seller's representations and warranties in the purchase agreement. Instead of the seller standing behind those statements with an escrow and an indemnity, an insurer does.
It has moved from unusual to standard in middle-market transactions, and the reason is that it solves a genuine problem for both sides at a cost that is small relative to the friction it removes.
The usual structure
Most policies are buy-side. The buyer is the named insured and purchases the policy, though the premium is frequently funded out of the transaction economics in a way both parties negotiate.
Coverage typically runs at ten to thirty percent of enterprise value. The retention, meaning the amount the insured bears before the policy responds, is usually between half a percent and one and a half percent of enterprise value, and it is common for the seller to bear half of that through a small escrow with the buyer bearing the rest.
The seller's contractual indemnity is then reduced to a nominal sum, or removed entirely for anything other than fraud and specifically excluded matters.
What it costs
Pricing has fallen substantially as the market has matured. For a technology transaction, expect a premium of two to four percent of the coverage limit, plus an underwriting fee in the range of twenty five to seventy five thousand dollars for the insurer's own diligence review.
On a hundred million dollar transaction with twenty million of cover, that is roughly four hundred thousand to eight hundred thousand dollars all in. Set against an escrow of ten to fifteen percent of consideration held for eighteen months, the economics usually favour the policy comfortably.
Why sellers want it
A clean exit. The seller receives the proceeds at completion rather than seeing ten percent held back for a year and a half, and the difference in present value alone often exceeds the premium.
Less negotiation. Caps, baskets, de minimis thresholds and survival periods consume a large share of the time between letter of intent and signing. Where an insurer stands behind the warranties, most of that argument disappears.
For a private equity seller distributing proceeds to a fund, it is close to essential, because an indemnity that survives the fund's life is a genuine structural problem.
Why buyers accept it
Offering it makes a bid more attractive in a competitive process, which is often the real reason it appears.
Beyond that, policies frequently provide longer survival periods than a seller would ever agree contractually, commonly three years for general warranties and six or seven for fundamental and tax matters. And claiming against an insurer is a great deal less damaging than suing the people who now work for you.
Where technology deals get scrutinised
Underwriters look hardest at the areas where technology businesses most often have gaps.
Intellectual property ownership, including whether contractor and employee assignments are complete, and whether open-source obligations have been reviewed. This is the most common source of enhanced diligence requirements.
Data protection and security, where the underwriter will want to see that a proper assessment has been done and that any incident history has been disclosed.
Customer contracts, particularly automatic renewal terms and change-of-control provisions, since both affect the revenue the buyer is underwriting.
Worker classification, which recurs in businesses that grew using contractors.
Where diligence in these areas is thin, the insurer will either exclude the representation or require further work before binding. That is worth knowing early, because an exclusion on the IP warranty removes much of the reason a technology buyer wanted the policy.
What is never covered
Known issues. The policy covers the unknown, so anything disclosed in the data room or identified in diligence is excluded, and the parties have to deal with it in the agreement through a specific indemnity or a price adjustment.
Forward-looking statements, purchase price adjustments, and in most cases pension underfunding and transfer pricing. Fraud is excluded from the seller's protection but generally covered for an innocent buyer.
Running the process
Allow two to three weeks, and start earlier than feels necessary. The underwriter reviews the draft agreement, the diligence reports, the data room and usually holds a call with the buyer's deal team.
The sequence that works is to appoint a broker at around the letter of intent stage, obtain non-binding indications from several insurers, select one, and run their diligence in parallel with the buyer's own rather than after it. Left to the end, the policy becomes the reason completion slips.
One practical point. The quality of the buyer's diligence directly determines the coverage available. An insurer cannot underwrite what nobody examined, so a light-touch diligence process produces a policy with holes in exactly the places the buyer was relying on it.
Editorial Team · Published for orientation, not as advice on a specific transaction. Any figure cited is orientation, not a valuation. See market notes.