Warranty and indemnity insurance: What can it do?

In standard M&A transactions, the interests of the parties are rarely aligned. Typically, a buyer demands broad representations and warranties from the seller as part of the definitive documents, while the seller seeks to restrict its exposure post-closing by giving limited and highly qualified warranties to the buyer. One way to bridge this gap is by procuring warranty and indemnity (W&I) insurance.

Although W&I insurance is not expressly approved by the Insurance Regulatory and Development Authority of India (IRDAI), the prevailing legal view is that it is covered under the ambit of commercial liability insurance, which has the approval of the IRDAI.

W&I insurance can be designed to provide cover for obligations to indemnify for losses arising out of a breach of warranties of either the seller or the buyer. A sell-side policy is a contract between the seller and the insurer, under the terms of which a seller can claim reimbursement for defence and investigation costs incurred where the buyer brings a claim for a breach of warranty.

Faraz Khan is a senior associate and Aishwaria S Iyer is an associate at Shardul Amarchand Mangaldas & Co. The views and opinions expressed are solely those of the authors and do not necessarily reflect the official view or position of the firm.