In the past few months I've watched two private equity transactions collapse because the vendor and the potential buyer couldn't come to an agreement on reps and warranties.
It's hardly surprising then that warranty and indemnity insurance (W&I) is becoming part of the Australian private equity landscape. Insurance brokers like Aon and Willis are marketing W&I to both buyers and sellers as a way to supplement or replace traditional warranties.
W&I insurance covers the buyer of a business if he suffers a financial loss due to a breach of the reps or warranties. It's attractive to the seller because it reduces or eliminates a nasty liability that could emerge after they've sold their business.
It sounds like a win for all parties, but as always there's a catch. For one thing, the price of W&I makes insuring your chipped 911 Turbo look like taking out a policy on Granny's VW Bug. Typical premiums are 3%-5% of the amount insured. So if it's a $100m transaction, with a warranty cap of 50%, then you're looking at a policy cost of $1.5m+. I also wonder about the ease of collecting against these policies . . . it's tough enough getting these guys to pay for a ding on the front bumper.
Still, W&I might be a bargain compared to the cost of letting a good deal slip away.