Warranty and indemnity (W&I) insurance: From diligence to disclosure

Diligence under W&I – Key considerations

Start diligence early

Typically, we look to begin the diligence process as early as possible in a transaction, ideally once heads of terms have been agreed. This early start provides valuable time to gain a detailed understanding of the target business and helps ensure that any key issues are identified and addressed proactively. While diligence processes are generally tailored to the commercial realities of each deal, a comprehensive approach is particularly beneficial where W&I insurance is involved, as it supports a smooth underwriting process and maximises the scope of available cover.

Early and thorough diligence also helps buyers gain greater certainty around potential risks, enabling them to address matters in a structured and efficient way. By identifying issues at an early stage, parties are often better placed to explore appropriate solutions, whether through the policy itself or within the SPA, helping to facilitate a more seamless transaction process and reducing the likelihood of unexpected complications later in the deal.

Dealing with known vs unknown issues

Both buyers and sellers share a common interest in ensuring that risks are identified, understood and addressed appropriately. While buyers are focused on gaining a clear picture of potential risks, sellers are equally keen to ensure that issues are assessed fairly and proportionately so that they can fully benefit from the protection offered by the W&I policy. As a result, each identified risk is carefully reviewed on its own merits before determining the most appropriate way to address it.

Where a risk is sufficiently material, it may ultimately be dealt with through a specific indemnity. These provisions are often the subject of detailed discussion, with both parties working together to ensure that any indemnities included are targeted, necessary and reflective of the underlying risk profile of the business. Typical examples may include identified tax exposures, ongoing litigation or instances of significant regulatory non-compliance.

This highlights the importance of how risks are analysed and presented throughout the transaction process. A well-considered approach can help distinguish between matters that are appropriately addressed by the W&I policy and those that require specific treatment, enabling sellers to maximise the value and protection that W&I insurance can provide while giving buyers confidence in the allocation of risk.

How risks are presented

The way a particular risk is described and analysed in a due diligence report can have a significant impact on how it is viewed and addressed by the various stakeholders involved in a transaction. Accordingly, both buyer and seller advisers should carefully consider factors such as the potential quantum of the risk, the likelihood of it materialising, whether it can be readily remedied following completion, and whether any associated costs may be recoverable from a third party.

Discussions between the parties often focus on identifying the most appropriate treatment for specific issues and ensuring that risk is allocated in a balanced and commercially sensible manner. In this context, sellers’ advisers will often consider carefully how matters are addressed in the transaction documentation, as the classification of an issue can influence the extent to which it is covered by the W&I policy.

Importantly, not every issue falls neatly within the scope of insurer cover or lends itself to a specific indemnity. In practice, some matters occupy a middle ground, where the level of risk and the most appropriate means of addressing it may be less clear. While these “grey area” issues can require more detailed analysis, they also provide an opportunity for buyers, sellers and insurers to collaborate in developing pragmatic solutions that reflect the specific circumstances of the transaction and support a successful outcome for all parties.

Avoiding the ‘grey area’

Once an issue has been identified, the focus turns to determining the most appropriate way to address it within the wider transaction structure. In some cases, this may involve resolving the matter prior to completion and making it a condition precedent, such as obtaining the necessary consents under change of control provisions in key commercial contracts. In other situations, the issue may be reflected in the purchase price, for example where existing financing arrangements need to be settled. Equally, certain matters can be managed effectively following completion, such as updating employee handbooks or policies to ensure ongoing compliance.

The key to making these decisions with confidence is having access to the right information at the right time, which is why thorough due diligence remains so valuable. From our experience, identifying and addressing information gaps at an early stage enables the parties to evaluate issues more effectively, agree the most appropriate course of action and maintain momentum throughout the transaction. By taking a proactive approach, buyers and sellers are often able to manage risks efficiently while minimising the potential for delays and supporting a smoother path to completion.

Disclosure

The disclosure process can be viewed as a natural extension of the due diligence exercise, providing an additional opportunity for parties to refine their understanding of the target business and ensure that risks are allocated appropriately. It is often during this stage that further information comes to light, enabling buyers, sellers and insurers to consider matters in greater detail and, where necessary, agree the most suitable approach to addressing them.

For this reason, it is generally beneficial for significant issues to be identified and discussed as early as possible in the transaction process, rather than emerging for the first time in the disclosure letter. While this may not always be achievable, particularly in transactions with longer timetables where circumstances can evolve over time, close alignment between the diligence and disclosure processes helps to promote transparency, minimise surprises and maintain deal momentum.

Ultimately, a well-coordinated approach to diligence and disclosure reinforces the value of asking the right questions early, ensuring that key issues are identified, understood and addressed at the appropriate stage. This can help facilitate a smoother transaction process, support a more efficient underwriting exercise and increase confidence for all parties as the deal progresses towards completion.

Best practice considerations for W&I transactions

W&I insurance has become an integral part of the modern M&A landscape, offering significant benefits to both buyers and sellers by facilitating clearer risk allocation and supporting smoother transaction outcomes. However, its effectiveness is closely linked to the quality of the diligence and disclosure processes that underpin it.

A proactive and collaborative approach from the outset of a transaction can deliver considerable advantages. Early and thorough due diligence enables parties to identify, assess and address potential issues before they become obstacles, while careful consideration of how risks are presented and managed helps maximise the scope and value of available W&I cover. Equally, a well-aligned disclosure process promotes transparency, supports the underwriting exercise and reduces the likelihood of unexpected issues arising late in the deal timetable.

In practical terms, there are a number of steps parties can take to maximise the benefits of W&I insurance:

• Start diligence early, ideally following agreement of heads of terms, to allow sufficient time to investigate key issues and respond proactively to potential concerns.
• Close information gaps quickly, as early access to complete and accurate information helps maintain transaction momentum and supports informed decision-making.
• Assess and present risks carefully, considering factors such as materiality, likelihood, potential remedies and available recoveries from third parties.
• Address known issues strategically, determining whether they are best dealt with through pre-completion actions, purchase price adjustments, specific indemnities or post-completion remediation plans.
• Align diligence and disclosure processes, ensuring that material issues are identified, discussed and evaluated throughout the transaction rather than emerging for the first time at the disclosure stage.
• Maintain open communication between buyers, sellers, advisers and insurers, helping to facilitate pragmatic solutions, particularly where issues fall into the so-called “grey area” between insurer cover and specific indemnities.

Ultimately, the most successful transactions are those in which diligence, disclosure and insurance are viewed as complementary parts of a single process rather than separate workstreams. By investing time in understanding risks early, closing information gaps and maintaining open dialogue throughout the transaction, buyers and sellers can enhance certainty, preserve deal momentum and make the most of the protections that W&I insurance is designed to provide. Following these practical principles will better position parties to achieve a smoother underwriting process.