TRW & Co · M&A and private capital
Warranty and Indemnity Insurance in UK Deals: How It Works
Warranty and indemnity insurance lets a buyer claim against an insurer, not the seller, when a warranty in a UK purchase agreement proves untrue. It gives sellers a clean exit and buyers a creditworthy counterparty, but it covers only unknown breaches. This guide explains policy terms, exclusions, pricing, underwriting and the effect on negotiations.
Key pointW&I insurance moves the negotiation from caps to coverage. Known issues, forward-looking warranties and price adjustments remain uninsured, so every material diligence finding still needs a price change, a specific indemnity or separate cover.
At a glance
Buy-side cover dominates
In most UK deals the buyer takes the policy and claims against the insurer, allowing the seller to cap its own liability at a nominal amount.
Unknown risks only
Policies exclude matters the deal team knew, matters disclosed, forward-looking warranties, price adjustments and specific indemnities, plus deal-specific exclusions.
Fair presentation duty
Section 3 of the Insurance Act 2015 requires the insured to make a fair presentation of the risk, backed in practice by no-claims declarations.
Premium attracts IPT
The premium is usually a single payment calculated on the limit, and insurance premium tax at the standard rate of 12% is added.
Diligence drives cover
Insurers underwrite on the buyer's diligence reports, so areas not properly investigated are likely to be excluded or treated as uninsured.
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Warranty and indemnity insurance: the short answer
Warranty and indemnity insurance, usually called W&I insurance, covers loss from breaches of the warranties and tax covenant in a share or asset purchase agreement that were unknown when the deal was signed. In most UK deals the buyer takes out the policy. If a warranty proves untrue, the buyer claims against the insurer instead of the seller, and the seller's own liability can be capped at a very low, often nominal, amount.
That gives sellers a clean exit, which matters for private equity funds returning money to investors and for founders who stay on in the business. It gives buyers a creditworthy counterparty and avoids suing the management team they have just backed. The trade-off is that cover only extends to unknown risks: known issues, forward-looking statements and a list of standard exclusions remain with the parties.
This guide explains how a policy is structured, what it excludes, how it is priced and underwritten, and how it changes the negotiation of the purchase agreement in the UK market as of October 2026.
Why deals use W&I insurance
Traditional deals put the seller on risk for the warranties. The buyer negotiates caps, thresholds and time limits, and often asks for an escrow or retention to secure claims. W&I insurance replaces much of that with a policy, and is now common in UK private equity transactions and in many mid-market trade sales.
Sellers favour it because they can distribute the proceeds immediately, with no escrow and minimal residual liability. That is especially valuable for funds nearing the end of their life and for multiple individual sellers who would otherwise be jointly and severally liable. Buyers favour it in competitive auctions, where offering to rely on insurance makes a bid more attractive, and where claiming against continuing management would damage the relationship.
Insurance can also bridge a gap. If a seller will only give a low cap, a policy can extend recovery to a level the buyer's investment committee accepts, and the policy period can be longer than the seller would agree. Our overview of warranties and indemnities explains the underlying contractual protection the policy sits on.
How a W&I policy works
Buy-side and sell-side policies
A buy-side policy is taken out by the buyer and pays the buyer directly for loss from a breach. It is by far the more common form in the UK. A sell-side policy protects the seller against claims made by the buyer, but the buyer still has to sue the seller first. Sell-side cover is rarer, and is mainly used where the buyer insists on seller recourse.
Key policy terms
- Limit of liability. The maximum the insurer will pay, usually set as a proportion of the enterprise value, chosen by the buyer according to its risk appetite and budget.
- Retention. The amount of loss the insured bears before the policy responds, similar to an excess. Retentions have fallen in recent years and may be borne partly by the seller up to its cap.
- Policy period. Typically mirrors the purchase agreement, with a shorter period for general warranties and a longer period for fundamental warranties and tax.
- Premium. Usually a single payment calculated as a rate on the limit, plus insurance premium tax and the underwriting fee. Who pays is a commercial point between buyer and seller.
- Subrogation waiver. The insurer agrees not to pursue the seller except for fraud, which is what gives the seller its clean exit.
Insurance premium tax applies to W&I premiums. HMRC guidance sets the standard rate at 12%, and cost comparisons should include it.
What drives the price of warranty and indemnity insurance
Pricing for warranty and indemnity insurance is set deal by deal. The main drivers are the limit purchased, the retention, the sector and jurisdiction of the target, the quality and breadth of the due diligence, and the scope of the warranty package. Targets in sectors with heavier regulatory or litigation exposure, or with operations in many countries, usually cost more to insure.
Market conditions matter too. When capacity is plentiful, insurers compete on price, retention and scope; when deal volumes rise or claims experience worsens, terms tighten. A broker's comparison of several indications is the best guide to the current market for a particular deal.
The duty of fair presentation
Under section 3 of the Insurance Act 2015, the insured must make a fair presentation of the risk before the policy is entered into. In W&I, this means the buyer must disclose what its deal team knows. Policies usually define the relevant knowledge by reference to named individuals and require a no-claims declaration at signing and, if there is a gap, at completion, confirming that they are not aware of any breach. An inaccurate declaration can defeat a later claim.
What W&I insurance does not cover
Every policy contains general exclusions, and insurers add deal-specific exclusions where diligence is thin or a known risk exists. The standard categories are broadly consistent across the London market, although wording varies by insurer.
- Known matters. Anything the deal team actually knew, and anything fairly disclosed, is excluded. This is the most important limitation.
- Forward-looking warranties. Statements about forecasts or future performance are generally excluded.
- Price adjustments. Completion accounts adjustments and leakage under a locked box are not covered.
- Covenants and specific indemnities. Pre-completion undertakings and indemnities for identified issues sit outside the policy.
- Specific risk areas. Commonly pension underfunding, certain environmental and asbestos risks, transfer pricing and secondary tax liabilities, and fines or penalties that cannot lawfully be insured.
- Uninvestigated areas. Where diligence did not cover a topic, insurers may exclude the related warranties or treat them as not underwritten.
A buyer who finds a serious issue in due diligence cannot insure it under the main W&I policy. Known risks need to be dealt with in the price, through a specific indemnity backed by an escrow, or through separate contingent risk or tax insurance, which insurers write as standalone products for identified exposures.
Seller recourse and W&I insurance compared
The table below compares the main ways warranty risk is allocated in UK deals. In practice many transactions combine elements, for example a low seller cap that sits beneath the policy retention.
| Feature | Seller recourse only | Buy-side warranty and indemnity insurance | Sell-side policy |
|---|---|---|---|
| Who the buyer claims against | The seller | The insurer | The seller, who claims on its policy |
| Seller's residual exposure | Up to the negotiated cap | Often nominal; fraud remains | Up to the cap, net of insurance |
| Security for claims | Escrow, retention or guarantee | Insurer's balance sheet | Insurer behind the seller |
| Known issues | Price, indemnity or escrow | Excluded; still need price or indemnity | Excluded |
| Relationship with management | Buyer may need to sue continuing managers | Claims are against the insurer | Claims are against the managers |
| Cost | No premium; cost lies in escrow and negotiation | Premium, insurance premium tax and fees | Premium paid by seller |
The underwriting process step by step
A W&I placement runs in parallel with the deal and must be built into the timetable. A typical sequence is set out below. Our guide to the UK M&A process shows where it fits in the wider deal.
- Appoint a broker. Specialist brokers approach the market. Check that the broker is authorised on the FCA Register; insurance distribution is regulated, and conduct rules for brokers are set out in the FCA Insurance: Conduct of Business sourcebook.
- Obtain indications. Insurers provide non-binding indications of price, retention, scope and proposed exclusions based on the draft agreement and a summary of the target.
- Select the underwriter. The buyer chooses an insurer and pays an underwriting fee. The insurer receives access to the data room and the diligence reports.
- Underwriting call. The insurer questions the buyer's advisers on the scope and findings of financial, tax and legal diligence.
- Negotiate the policy. The parties agree the policy wording, deal-specific exclusions and the treatment of each warranty, often through a warranty-by-warranty spreadsheet.
- Bind at signing. The policy is bound when the agreement is signed, with a no-claims declaration from the buyer's deal team.
- Completion and claims. A further declaration is given at completion if signing and completion are split. Claims are notified to the insurer under the policy's procedures.
How W&I changes the purchase agreement
Insurance shifts the negotiation rather than removing it. Because the buyer's recourse is to the insurer, sellers are more willing to give a full warranty package, and the debate moves from caps to the scope of cover.
For sellers
Sellers can usually cap their liability at a nominal figure or at a small amount covering part of the retention, and avoid escrow. Warranties should still be accurate and disclosure thorough, because a seller remains liable for fraud and the insurer can pursue it in that case. Warranties are often given at signing and repeated at completion, and sellers should check whether the policy covers the repetition.
For buyers
Buyers should align the agreement and the policy. Definitions of loss, materiality scrapes, knowledge qualifiers and disclosure standards should be consistent, or there may be gaps where the agreement gives a claim the policy does not pay. Insurers may also offer cover on enhanced terms, such as a knowledge scrape or broader definition of loss, sometimes for an extra premium. Our private equity team regularly negotiates these points in auction processes.
Tax deserves particular attention. The tax covenant is usually insured, subject to exclusions, and some policies provide a synthetic tax covenant where the seller gives none. Coordinate with transactional tax advisers to ensure the policy follows the structure.
An illustrative scenario
This scenario is illustrative only; the parties are generic.
A private equity fund sells a UK manufacturing business in an auction. The fund wants a clean exit with no escrow. The preferred bidder agrees to take out buy-side warranty and indemnity insurance, and the fund's liability is capped at a nominal amount except for title and fraud.
During diligence, the buyer's environmental consultants identify possible contamination at one site. The insurer excludes contamination at that site, so the buyer negotiates a specific indemnity from the fund for remediation costs, backed by a modest escrow. The rest of the warranty package is insured on standard terms.
A year after completion, the buyer discovers that a major supplier contract had been amended to give the supplier a termination right, which was not disclosed. The buyer notifies the insurer, provides evidence of the loss in value, and recovers under the policy, subject to the retention. The fund has no involvement because the insurer has waived subrogation except for fraud.
Risks and common mistakes
Disappointment with warranty and indemnity insurance usually traces back to one of four errors made before signing, not to insurers refusing valid claims.
Assuming the policy covers everything in the agreement
Warranty and indemnity insurance covers unknown breaches of the insured warranties and tax covenant, subject to exclusions. It does not cover specific indemnities, covenants, price adjustments or known risks. Buyers should map every protection in the agreement against the policy and identify gaps. For each gap, decide whether to seek seller recourse, separate contingent risk cover, a price change or simply accept the risk, and record that decision for the investment committee.
Thin or poorly scoped due diligence
Insurers underwrite on the strength of the buyer's diligence. If an area such as data protection, pensions or overseas subsidiaries was not properly investigated, the insurer may exclude the related warranties. Buyers sometimes discover late in the process that their cover is narrower than expected because diligence reports were limited in scope or heavily caveated. Agree a diligence scope with insurance in mind from the outset, and make sure reports address the warranties that matter most.
Careless no-claims declarations
The deal team must confirm at signing, and often at completion, that they are not aware of any breach. If a team member knew of an issue and it was not disclosed, the insurer may refuse a related claim. Define the deal team narrowly, circulate the declaration in advance, and ask each person to check their knowledge. Issues raised between signing and completion need careful handling, because new matters are usually excluded from cover.
Missing claim notification requirements
Policies contain notification and claims conduct provisions, including timing, the information required and the insurer's rights to participate in third-party claims. Failing to follow them can reduce or defeat recovery. Diarise the policy periods, which may differ from the agreement, and appoint someone to manage post-completion notifications. Where a third-party claim arises, involve the insurer early and obtain consent before settling.
Cross-border deals and next steps
Policies are written for UK and international deals, including acquisitions of UK companies by Bangladeshi, Gulf or Asian groups and UK buyers acquiring overseas targets. For overseas subsidiaries, insurers will want local diligence, and some jurisdictions bring specific exclusions. Where the seller is outside the UK and enforcement against it would be difficult, warranty and indemnity insurance can be particularly valuable because it replaces seller credit risk with an insurer in a familiar market.
Before committing to W&I, consider:
- whether the deal size and process justify the premium and timetable;
- the limit, retention and policy periods the investment case requires;
- which known issues need separate treatment;
- whether diligence scope supports full cover across the warranty schedule;
- how the agreement and policy definitions align;
- who in the deal team will give the no-claims declarations.
TRW & Co's mergers and acquisitions team works with brokers, insurers and our insurance lawyers to align policies with transaction documents, and supports buyers through legal due diligence. Our London office is authorised and regulated by the Solicitors Regulation Authority. Contact us to discuss a transaction.
Frequently asked questions
01What does warranty and indemnity insurance cover?
It covers financial loss from breaches of the warranties and, usually, the tax covenant in a share or asset purchase agreement, where the breach was unknown to the buyer's deal team at signing. It responds above a retention and up to the limit of liability. It does not cover known issues, matters fairly disclosed, forward-looking warranties, price adjustments, covenants or specific indemnities, and policies list further general and deal-specific exclusions.
02Who pays for W&I insurance, the buyer or the seller?
The buyer normally takes out and holds a buy-side policy, but who bears the cost is negotiated. In seller-friendly auctions, the buyer often pays the premium as part of a competitive bid. In other deals the cost is shared or reflected in the price. The cost includes the premium, insurance premium tax, the underwriting fee and the broker's remuneration, so compare total cost rather than the headline rate.
03Can the insurer sue the seller after paying a claim?
Normally only for fraud. W&I policies include a waiver of subrogation, under which the insurer agrees not to pursue the seller for breaches it has paid out on, except where the seller acted fraudulently. That waiver is what allows the seller to take a nominal cap and walk away with the proceeds. Sellers should still give accurate warranties and disclose thoroughly, because fraud exposure remains.
04How long does W&I underwriting take?
It depends on the deal and the quality of diligence, but the process runs in parallel with the transaction rather than adding a separate phase. It involves obtaining indications from several insurers, selecting one, giving access to the data room and reports, holding an underwriting call and negotiating the policy. Build it into the timetable from the start, particularly in auctions where signing dates are fixed.
05Does W&I insurance replace due diligence?
No. Insurers rely on the buyer's diligence reports and underwriting call to understand the risk, and will exclude or limit cover for areas that were not properly investigated. Thin diligence therefore narrows cover, sometimes significantly. Diligence also remains the only way to find known issues, which need to be addressed in the price or through specific indemnities because the policy will not cover them.
06Is W&I insurance only for large private equity deals?
No. It began in large private equity transactions but is now used across mid-market trade sales, real estate share deals and cross-border acquisitions. Whether it makes sense depends on the deal size, the cost relative to the protection, the seller's financial strength and the relationship between buyer and continuing management. For very small deals, a seller cap with escrow may be cheaper.
Sources and official materials
- Insurance Act 2015, section 3 — Duty of fair presentation
- Insurance Premium Tax (GOV.UK) — IPT rates and scope
- FCA Handbook: Insurance Conduct of Business sourcebook — Conduct rules for insurance distribution
- FCA Financial Services Register — Check broker and insurer authorisation
General information only, current as at 21 October 2026. It is not legal advice and does not create a solicitor–client relationship. It reflects the law of England and Wales unless stated otherwise; Scotland and Northern Ireland have separate legal systems, and the law changes frequently. Check current official sources and take advice on the facts of your matter.