WRAP solution for M&A deals

Aon Limited, the UK arm of the insurance broking and risk consulting firms, has unveiled an innovative insurance product called a Warranty Replacement and Acquisition Protection (WRAP), to replace the usual giving of warranties by a seller to a buyer in an M&A transaction.

This new type of insurance cover, which is the first of its kind in the UK insurance market, will be applicable in instances where a seller is unable to provide the buyer with the normal business warranties in the event of an issue arising with the business post sale.

Instead of the potential indeterminate risk that comes with buying a business without the benefit of warranties, the buyer can replace this exposure with a WRAP product.

In practice, it is the buyer that takes out the WRAP policy, and payment of the premium might be another item that the buyer and seller negotiate as part of the sale agreement. For instance, the seller could agree to pick up the cost of paying the premium on the basis that the sale price would not be discounted as a result of no warranties being given.

Anka Taylor, director of Aon’s transaction liability unit, says: “We have worked long and hard to come up with an innovative solution to the problem caused to potential buyers when sellers are unable to give warranties and we’re confident that we’ve achieved this via our new WRAP insurance product. There might be a number of reasons why the giving of warranties with the resultant long term liabilities can be a problem for certain types of seller. In particular, we think that the private equity market will find this risk transfer option extremely helpful, especially in instances where they want to achieve a clean exit with no residual liability, but with no resultant drop in the sale price.

In terms of cover, the WRAP policy is designed to respond to acquisition statements set out in the insurance policy, turning out to be untrue or inaccurate. Acquisition statements are similar to a standard set of warranties except that they are made within the context of the insurance policy, as opposed to the sale agreement.

Looking at the product from the point of view of a private equity firm, Stephen Drewitt, corporate partner at Macfarlanes said: “There are certain private equity disposals for which a traditional warranty & indemnity purchaser policy is not a solution. For example: transactions with management who refuse to accept any risk of liability, and; transactions with management who have no equity or with equity which has no value. Sales do occur without the giving of warranties but, in this context, they are often difficult to negotiate and there is usually an impact on the price of the sale. Indeed, some planned exits do not occur because the warranty debate is not resolved amongst the interested parties.”