Warranty & Indemnity Insurance in Singapore M&A: When It Closes the Deal and What It Really Covers

In mergers and acquisitions (M&A) transactions, many deals do not fail because the buyer and seller cannot agree on price. They fail because the parties cannot agree on risk.

The buyer wants protection if warranties are breached after completion. The seller wants a clean exit without escrow, long survival periods, or years of potential post-closing claims. The more uncertain the business, the more difficult this gap becomes.

Warranty and indemnity insurance, commonly known as W&I insurance, is designed to bridge that gap. It can transfer some unknown financial risk from the buyer or seller to an insurer, making it easier for the parties to agree on the scope and financial limits of seller liability. W&I insurance can be understood as protection for parties against financial loss arising from breaches of warranties and certain indemnities in an M&A sale and purchase agreement.

For Singapore sellers, W&I insurance can be powerful because it may reduce or eliminate escrow requirements, improve closing certainty, and help achieve a cleaner exit. But it is not magic. It does not usually cover known breaches. It typically excludes fraud. It also depends heavily on the quality of due diligence, disclosure and policy negotiation.

For legal or media queries, please write to Waltson at waltson.tan@28falconlaw.com or send a WhatsApp message to ‪+65 8079 0028.

What W&I insurance does

W&I insurance provides coverage for the insured party for some or all warranties and indemnities given by another party under the definitive agreement.

The insured party may be:

1. the buyer;
2. the seller; or
3. in some cases, the target company.

In practice, W&I insurance is often used to protect against financial loss arising from breaches of warranties in the share purchase agreemenr (SPA) or asset purchase agreement (APA). This category of insurance can be understood as a bespoke transactional risk product developed to cover warranty and indemnity exposure in M&A transactions.

The commercial point is simple: instead of requiring the seller(s) to stand behind every agreed warranty with its own balance sheet, the parties can transfer part of the risk to an insurer.

What problem does W&I insurance solve?

The core problem is risk allocation.

In many M&A transactions, buyers and sellers struggle to agree on:

1. how broad the warranties should be;
2. how long warranties should survive after completion;
3. the financial cap on seller liability;
4. whether escrow should be required;
5. whether indemnities should be given;
6. how unknown risks should be allocated; and
7. whether the seller can walk away cleanly after closing.

These points can delay or abort transactions. W&I insurance can help by moving part of the unknown financial risk away from the parties and onto an insurer.

As an example, this can make both sides more comfortable in the following manner:

1. the buyer obtains recourse against an insurer;
2. the seller reduces post-completion liability exposure;
3. the buyer may accept reduced escrow or a lower seller cap;
4. the seller is more likely to receive the sale proceeds at completion; and
5. the parties may preserve their commercial relationship after closing.

Why W&I insurance matters for sellers

For sellers, W&I insurance is often attractive because it supports a clean exit.

Without W&I insurance, buyers may ask sellers to:

1. give broad warranties;
2. accept long survival periods;
3. agree to high liability caps;
4. provide indemnities;
5. place money into escrow; or
6. accept post-closing claim exposure.

That can be unattractive if the seller wants certainty and finality after completion.

With a properly structured W&I policy, claims for covered warranty breaches may be directed primarily against the insurer rather than the seller. This can reduce the likelihood of post-closing disputes involving the seller.

For founder-owners, family sellers and minority sellers, this can be especially valuable. These sellers often care about avoiding open-ended liability and preserving a clean financial exit.

Why W&I insurance matters for buyers

Buyers also benefit.

A buyer may obtain:

1. protection beyond the seller’s negotiated liability cap;
2. a longer claim period than the seller is willing to give;
3. recourse against an investment-grade insurer;
4. protection where sellers are individuals, minority sellers or financially distressed;
5. a cleaner claims process that does not require immediate confrontation with the seller; and
6. a more competitive bid in an auction process if the buyer’s proposal reduces sell-side exposure.

A buyer may replace the indemnity expected from the seller with insurance, or obtain cover that extends the period for making claims and to a higher limit than that offered by the seller.

This is important where the seller remains involved in management after completion. If claims are made directly against the seller, the commercial relationship can deteriorate quickly. W&I insurance can preserve the relationship by placing the insurer at the centre of the claim.

What W&I insurance usually does not cover

W&I insurance is not a substitute for due diligence or disclosure.

Policies generally do not cover:

1. known breaches;
2. issues already disclosed before completion;
3. fraud;
4. specific matters excluded under the policy; and
5. risks outside the negotiated scope of cover.

The key point to note is that W&I policies are intended to cover unknown risks. Known breaches must be disclosed before completion. Fraud is typically excluded, meaning fraud-related claims remain addressed against the seller.

This limitation is crucial. A seller cannot use W&I insurance to hide a known problem. A buyer cannot rely on W&I insurance to avoid conducting proper due diligence.

Why due diligence quality affects W&I coverage

Insurers care deeply about the quality of the transaction process.

If the insurer sees that the disclosure process is weak or due diligence is limited, the insurer may:

1. quote higher premiums;
2. offer narrower coverage;
3. impose more exclusions; or
4. decline to cover certain matters.

This is why buy-side legal counsel plays an important role. The buyer’s lawyers must ensure that the seller fully discloses known issues, and that due diligence is sufficiently robust to support the policy.

From a seller’s perspective, strong disclosure can improve buyer confidence and reduce friction. From a buyer’s perspective, strong diligence can improve coverage and reduce premium risk.

The commercial lesson is straightforward: better due diligence can produce better W&I outcomes.

Coverage limits and premiums

Although there is no single prevailing market practice, a useful indicative range is as follows:

1. policy coverage typically falls between 10% and 30% of deal value; and
2. premiums typically range between 1% and 3% of the policy limit.

For example, if the policy limit is S$10 million, a 1% to 3% premium range would imply a premium of approximately S$100,000 to S$300,000, subject to underwriting, exclusions and deal-specific factors.

In practice, however, obtaining W&I insurance for deals below S$5 million can be difficult in practice because few insurers are willing to offer policies due to the lower premiums involved.

This is important for Singapore SME sellers. W&I insurance is useful, but it may be economically viable only above a certain transaction size.

Claim periods: how long does coverage last?

W&I policies are subject to post-closing claim periods set by insurers.

Typical coverage periods are as follows:

1. fundamental warranties: up to 6 years;
2. general business warranties: 2 to 5 years; and
3. tax warranties: subject to the prevailing statutory time limit.

For Singapore tax matters, the statute of limitations is generally 4 years after the relevant year of assessment, although the Singapore tax authority is not time-barred from raising additional assessments if there is fraud or wilful default.

These claim periods matter because they affect both buyer protection and seller finality. A buyer wants enough time to discover breaches. A seller wants certainty that liability exposure does not continue indefinitely.

Buy-side, sell-side and “stapled” W&I policies

W&I insurance may be arranged on the buy-side or sell-side.

In many markets, buyer-side policies are more common. In the market, the overwhelming majority of W&I placements are initiated by the buyer, although seller-initiated processes and “stapled” approaches also exist.

A buyer-side policy generally allows the buyer to claim directly against the insurer. This is often attractive to sellers because, save for fraud or excluded matters, they are largely outside the claims process.

A seller-side policy may be useful where sellers want to be the insured party and have more control over coverage.

A stapled policy process may be seller-initiated but later handed over to the buyer. This can be useful in competitive sale processes because the seller can test the W&I insurance market early and present bidders with a cleaner risk solution.

How W&I insurance helps auction sales

In auction sales, sellers often prefer bids that reduce post-closing risk.

A bid backed by W&I insurance can be more attractive because it may:

1. reduce the need for escrow;
2. reduce seller warranty liability;
3. give the buyer comfort without increasing seller exposure;
4. preserve relationships where sellers remain involved post-closing; and
5. create a cleaner path to closing.

In a seller-friendly process, a buyer that proposes comprehensive W&I coverage may improve the competitiveness of its bid because it reduces the seller’s exposure.

This is especially relevant where there are multiple sellers, minority sellers, individual sellers or family sellers concerned about joint liability.

W&I insurance and escrow

Escrow is often used to ensure the seller can meet warranty or indemnity claims.

For sellers, escrow is unattractive because it delays access to sale proceeds. It also prevents a clean exit.

W&I insurance can reduce or eliminate the need for escrow because the buyer’s recourse for covered claims shifts to the insurer. That said, this depends on the negotiated policy, exclusions, retention, and the buyer’s risk appetite.

Sellers should not assume that W&I insurance automatically removes every escrow requirement. The policy and SPA/APA must be reviewed together.

Claims process: who does the buyer claim against?

Where the policyholder is the buyer, there is generally no requirement under a typical policy for the buyer to first attempt recovery from the seller.

This is one of the central seller benefits.

The seller is generally outside the claim process, except in cases such as fraud or excluded matters. Although the buyer and insurer may waive most subrogation rights against the seller, insurers typically retain the right to subrogate in cases of seller fraud.

It is also of utmost importance to understand the claims process when a potential breach arises under a W&I policy.

Seller fraud remains different

Fraud is the major carve-out.

W&I insurance typically excludes coverage for fraud. If seller fraud occurs, the insurer may retain subrogation rights against the seller after compensating the buyer.

This matters for drafting and disclosure. Sellers should ensure the disclosure process is thorough and accurate. Buyers should ensure due diligence is comprehensive and properly documented.

W&I insurance is not a shield for dishonest disclosure.

What sellers should negotiate

If you are a seller, do not treat W&I insurance as an insurance document only. It must be coordinated with the SPA/APA.

Key points to negotiate include:

1. which warranties are covered;
2. which indemnities are covered;
3. the seller’s residual liability;
4. whether escrow is still required;
5. claim periods;
6. exclusions;
7. fraud carve-outs;
8. subrogation rights;
9. policy limits;
10. retention or deductible;
11. buyer conduct during claims;
12. whether the insurer can pursue the seller; and
13. how the policy interacts with the disclosure letter.

Legal counsel should review both the definitive agreement and the W&I policy to ensure that the seller’s exposure is not unintentionally preserved.

What buyers should negotiate

If you are a buyer, W&I insurance is not a reason to relax due diligence.

Buyers should focus on:

1. comprehensive due diligence;
2. robust disclosure process;
3. policy exclusions;
4. claim notification requirements;
5. mitigation obligations;
6. policy retention;
7. claim periods;
8. whether known issues require specific indemnities outside the policy; and
9. whether the coverage matches the warranties in the SPA/APA.

A buyer should also remember that W&I insurance is designed for unexpected issues. Known issues should be addressed in the transaction documents, typically through specific indemnities, price adjustment, condition precedent, or other risk allocation tools.

When W&I insurance is most useful

W&I insurance may be especially useful where:

1. the seller wants a clean exit;
2. the buyer wants stronger recourse than the seller is willing to provide;
3. the seller is an individual, family seller or minority seller;
4. there are multiple sellers and joint liability concerns;
5. the buyer wants to preserve a relationship with management sellers;
6. escrow is commercially unattractive;
7. an auction process is being run;
8. unknown risks are blocking agreement; or
9. the deal is large enough to justify the premium and underwriting process.

W&I insurance is less useful where:

1. the deal value is too small;
2. the key risks are known and excluded;
3. due diligence is weak;
4. the seller has not disclosed properly;
5. the premium is disproportionate;
6. the policy excludes the main risks; or
7. the parties mistakenly believe it replaces legal drafting.

For legal or media queries, please write to Waltson at waltson.tan@28falconlaw.com or send a WhatsApp message to ‪+65 8079 0028. 

If you would like to book a W&I Insurance Deal Feasibility Review, send us your draft SPA/APA warranty schedule, disclosure letter, deal value and proposed liability cap.

We will assess:

1. whether W&I insurance is commercially viable for your transaction;
2. whether the deal size is likely to justify a policy;
3. what risks may remain with the seller;
4. whether escrow can be reduced or avoided;
5. how the W&I policy should interact with the SPA/APA;
6. whether known issues need specific indemnities; and
7. what changes should be made before signing.

For sellers, this review is designed to support a cleaner exit. For buyers, it helps ensure the policy actually matches the risk allocation in the deal documents.

Frequently asked questions (FAQ)

1. What is W&I insurance?

Warranty and indemnity (W&I) insurance is an M&A insurance product that covers the insured party for financial loss arising from certain breaches of warranties and indemnities in the definitive agreement.

2. Who can be insured under a W&I policy?

The insured party may be the buyer, the seller or, in some cases, the target company.

3. Does W&I insurance cover known breaches?

Generally, no. Known breaches and issues disclosed before completion are typically excluded.

4. Does W&I insurance cover fraud?

Fraud is typically excluded. If seller fraud is involved, the insurer may retain rights to pursue the seller.

5. Why do sellers like W&I insurance?

Because it can reduce post-completion liability exposure, reduce or eliminate escrow, and support a cleaner exit.

6. Why do buyers like W&I insurance?

Because it gives recourse against an insurer, and may extend claim periods or coverage beyond what the seller is willing to provide.

7. How much W&I coverage is typical?

Although there is no uniform market practice, coverage often falls between 10% and 30% of deal value.

8. How much does W&I insurance cost?

Premiums commonly range between 1% and 3% of the policy limit, depending on underwriting, transaction size, exclusions and coverage.

9. Can small deals use W&I insurance?

It can be difficult for deals below S$5 million because insurers may be reluctant to offer policies where premiums do not make commercial sense for them.

10. Does W&I insurance replace legal advice?

No. The policy must be coordinated with the SPA/APA, disclosure letter, indemnities, exclusions, escrow and claims procedures. Legal advice remains essential.

For legal or media queries, please write to Waltson at waltson.tan@28falconlaw.com or send a WhatsApp message to ‪+65 8079 0028.