W&I insurance does not repair unclear SPA drafting
Warranty and indemnity insurance can change who ultimately bears a warranty claim, but it does not replace the purchase agreement. This note sets out where the policy and the SPA diverge, and how that gap is managed in the documents.
The policy follows the transaction, but not completely
Warranty and indemnity insurance is used on a substantial share of transactions and, now that the product has become more accessible, increasingly in the lower mid-market as well, particularly where a private equity fund is selling. It does not follow that the SPA warranty package has become a secondary document.
The SPA defines the promises made on signing and the contractual route for a claim. The policy is a separate insurance contract, ordinarily governed by its own law and terms, which selects from that package and imposes separate conditions. Insurance law therefore sits alongside the law governing the SPA rather than displacing it.
Underwriting begins with the diligence reports, the virtual data room, management calls and the negotiated SPA. The insurer tests whether the diligence scope is sufficient for the warranties it is being asked to cover. A thin workstream, an unresolved issue or a late change to a warranty can reduce cover, increase the retention or produce an exclusion, even where the SPA continues to give the buyer a claim against the seller.
The practical consequence is that the SPA and policy need to be read as a pair from the first underwriting call. The warranty schedule, disclosure, limitations and claims provisions should be mapped before terms settle. A policy bound only after the SPA has settled can expose gaps.
Knowledge and disclosure have separate functions
A knowledge scrape can make a warranty unqualified as against the seller, or remove the relevance of the seller's knowledge to a claim. It does not ordinarily erase what the insured buyer or its transaction team knows. Known matters are commonly excluded, and an insurer may require the buyer to disclose information arising from diligence, management presentations and the underwriting process, subject to the policy terms and underwriting questions.
That distinction is particularly important for general disclosure. An SPA may treat the contents of a data room as disclosed, subject to the agreed standard of fair disclosure, and may thereby protect the seller from a warranty claim. Underwriters do not necessarily treat the same general disclosure as a reason to decline cover. Conversely, an insurer may exclude a matter identified in a diligence report even if the SPA disclosure standard leaves the buyer with a contractual claim.
The policyholder's statutory duty of disclosure concerns information relevant to the insurer's assessment of the risk. Its application depends on the policy, the underwriting questions and the facts supplied before inception. A disclosure letter should not be drafted on the assumption that its effect under the SPA determines whether a risk is insured.
A workable process allocates ownership of the data-room index, the diligence findings register and the underwriting Q&A. It records which matters are known issues, which are disclosed only for SPA purposes and which are specifically excluded or covered under the policy. That record also assists when a post-completion issue is first assessed against the SPA, the disclosure letter and the policy.
The usual exclusions are the live gaps
Common exclusions may include known issues, secondary tax liabilities, tax structuring risk, pension underfunding, environmental matters, forward-looking statements, transfer pricing and cyber matters. Each exclusion needs to be checked against the facts of the target, the diligence reports and the policy terms. These are often precisely the areas in which a buyer has identified a risk but has not yet been able to quantify its financial effect.
The response is not a generic statement that all excluded risks remain with the seller. A material identified exposure may require a specific indemnity, a price adjustment, a retention, an escrow or a condition precedent. The document should identify the relevant event, the measure of recovery, any monetary cap and time limit, the claims procedure and whether the seller has conduct rights.
Loss is another frequent point of divergence. The SPA may define Loss broadly or set a particular damages measure, while the policy may exclude particular heads of loss, apply a retention or determine loss under a different calculation. Matters such as diminution in value, tax gross-up, multiple-based calculations, mitigation, recoveries from third parties and costs need consistent treatment or an express acknowledgement that cover is narrower.
Synthetic warranties can fill some gaps where a seller will not give a warranty, for example around a particular operational fact. They are insurer-created undertakings rather than seller promises. Their wording, diligence requirements and remedies therefore belong in the coverage review, not merely in the SPA schedule.
Claim mechanics and residual seller liability
A policy is only useful if a claim is notified and advanced in the manner the policy requires. The law sets requirements for notice of an insured event and attaches consequences to non-compliance, while the policy will prescribe its own notice address, content, timing and consent requirements. A late or incomplete notice can prejudice the insurer's position and leave an otherwise sound underlying claim uninsured.
The SPA should preserve the factual and documentary route needed for insurance recovery. It should also distinguish between a notice to the seller and a notice to the insurer, because one does not necessarily satisfy the other. The buyer's post-completion team needs a short protocol identifying triggers, deadlines, responsible people and the records to retain.
In a EUR 1 recourse structure, the seller's liability for insured warranty claims is limited to EUR 1, with the buyer looking to the insurer for recovery. The SPA must nevertheless state what remains against the seller, usually fraud, deliberate misconduct, specified indemnities, fundamental warranties or amounts outside cover. The seller's EUR 1 exposure also needs to work with subrogation and any insurer waiver of recourse.
The following mapping is usually more useful than a general statement that the policy mirrors the SPA:
| SPA clause | Policy clause | Typical gap | Fix |
|---|---|---|---|
| Warranty and knowledge qualifier | Insured warranty and known-matters exclusion | Buyer knowledge is not neutralised by a seller knowledge scrape | Maintaining a findings and insurer-disclosure register |
| Disclosure letter | Disclosure and specific exclusions | General data-room disclosure has a different effect | Comparing each material disclosure with underwriting conclusions |
| Loss and limitations | Definition of Loss, retention and exclusions | The policy measures or excludes loss differently | Aligning the measure, or reserving a remedy against the seller |
| Claims notice | Notification and conduct provision | An SPA notice does not notify the insurer | Using one integrated claims protocol |
| Seller liability cap | Recourse and subrogation provision | EUR 1 recourse may leave uncovered claims without remedy | Listing all seller-retained liabilities expressly |
Points that decide the outcome
- The SPA remains the primary allocation of transaction risk, even where insurance is intended to meet warranty claims.
- Underwriting conclusions should be matched to the final SPA before the policy is bound.
- Buyer knowledge, seller knowledge and disclosure are separate concepts with separate consequences.
- Known and excluded matters require a specific contractual or pricing response where the exposure is material.
- The definition of Loss and the claims timetable should be tested across both documents.
- A EUR 1 recourse structure works only when the seller-retained claims are stated clearly.
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