5 minute read 15 Jun 2022
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How do W&I insurances impact SPA negotiations and tax due diligences?

By Marc Vogelsang

Senior Manager, International Tax and Transaction Services | EY Switzerland

Head Real Estate Transaction Tax, Swiss Certified Tax Expert and Swiss Attorney-at-Law. Supports clients in all M&A and real estate tax related questions as well as tax litigation | controversy.

5 minute read 15 Jun 2022

W&I insurances became increasingly popular in the last decade. Our EY experts say what are the impacts on transaction agreements and tax due diligence.

In brief
  • Taking out W&I insurance for a deal has various effects on transaction agreements and tax due diligence.
  • The provisions and mechanics of the transaction agreements should be closely aligned with the W&I insurance coverage as well as its exclusions.
  • Any potential W&I insurance should be addressed early in the tax due diligence process.

Warranty & Indemnity (W&I) insurances are well established in our daily M&A tax practice. Also known as Reps & Warranties (R&W) insurances in the US, these products became an important instrument to get deals through. While transaction agreements primarily allocate risks between the parties, W&I insurance provides a risk transfer to a solvent third party: The W&I insurer covers certain losses arising from the breach of the seller's representations & warranties and indemnities. 

Within the risk areas regularly covered by W&I insurance, there is also a clear forerunner in terms of notified breaches: According to a claims study conducted by insurance broker Marsh for the years 2009 to 2019, tax dominated the breaches by far and accounted for almost a third of all notifications under W&I insurances.

Number of notifications under W&I insurance caused by tax between 2009 and 2019


Source: Marsh, Transactional Risk Insurance Claims Study, EMEA, 2019

Despite the increasing relevance, parties often struggle with the various impacts W&I insurance has on a deal. In this article, our EY experts share their thoughts on W&I insurance in tax and the related impacts on transaction agreements as well as tax due diligence.

For which transactions?

The prevailing transaction type for W&I insurance is the share deal, as the buyer acquires the target with its entire tax legacy. In theory, W&I insurance would also make sense from a tax perspective for certain asset deals, especially for real estate transactions with their attached indirect tax risks. In terms of size, W&I insurances are most common in transactions with a deal value of CHF 100m and more. 

Reasons for W&I insurance

There are several reasons for the seller or buyer side to take out W&I insurance coverage in a deal, inter alia:

  • Strategic advantage in the auction process: Bidders may improve their bid's competitiveness by taking out W&I insurance coverage, as they can offer a deal with limited seller post-closing liabilities.
  • "Dress-up" the target: A W&I insurance may also enhance the target's attractiveness to the buyer by including the insurer as a solvent and professional counterparty. The insurance coverage generates value in particular if the seller's side is in distress or consists of numerous individuals.
  • Clean exit for the seller(s): Especially private equity and individuals as sellers look for a clean exit from their investment and want to re-invest the sale proceeds. By taking out W&I insurance coverage, the parties facilitate negotiations, limit the seller's post-closing exposure and avoid escrow discussions.
  • Enhancing transaction security: Obtaining W&I insurance coverage can reduce the transaction inherent conflicts of interest between the buyer and the seller as risk coverage is outsourced to the W&I insurer.
  • Stapled Insurance: In the context of private equity but also in corporate carve-out auction sales, the seller's side may insist on W&I insurance. In some cases, the seller even gets different offers by W&I insurances for the potential buyer(s) during the auction process with a subsequent seller-buyer-flip of the insurance policy (“stapled” insurance).

Typical carve-outs from W&I insurance coverage

As regards tax risks, some carve-outs developed as market standards:

  • Known matters from the tax due diligence
  • Transfer pricing risks
  • Permanent establishment risks
  • Secondary tax liability / tax groups
  • DAC6
  • Availability of deferred tax assets (DTAs) / tax refunds
  • Purchase price adjustments / leakage in locked-box deals
  • Fines and penalties

To cover known risks, the insurers regularly offer the (more expensive) tax insurances (type of contingent risk insurance).

Impacts of W&I insurance on transaction agreements

Involving W&I insurance has various impacts on negotiating and drafting the transaction agreements. As the W&I insurance coverage is generally based on the terms of the transaction agreement, a fully-fledged liability concept is still necessary (exception: "synthetic" W&I insurance coverage). From our EY expert's practice, some of the most relevant implications of W&I insurance on tax provisions are:

  • Recourse to the seller(s): One of the essential questions that should be clarified early stage is whether the buyer shall have recourse to the seller(s) if the W&I insurer does not cover the loss suffered. The buyer's possibility to have recourse often decides whether the seller can enter the negotiations with a "balanced" first SPA draft. 
  • Definition of loss: A tax claim may qualify as a damage for the buyer, but not the target (e.g. increased corporate income tax rate due to a successfully challenged tax residency). It is essential for the buyer that he carefully reviews and aligns definitions. Otherwise, he risks falling short of insurance coverage. 
  • Conduct of third-party claims section: In practice, this section often does not reflect that buyer's claims under the agreement are against the W&I insurer, not against the seller. If not revised properly, the seller may be given the same information and participation rights as if he was liable for the losses resulting from the breaches. In extreme cases, he may even be in the driver's seat for negotiations with the tax authorities and contesting tax claims.
  • Divergences in the warranty spreadsheet: The W&I insurer regularly includes knowledge qualifiers and limitations on the scope of application of the insurance, which may lead to liability gaps between the seller’s side representation and warranties on the one hand and the insurance coverage on the other hand. These gaps need to be reviewed and addressed properly by the buyer.
  • Covenants: W&I insurances regularly do not cover losses from actions and omissions after closing, e.g. the breach of covenants. Hence, the buyer is to address the corresponding risk separately. A vivid example under Swiss tax law is the business continuation covenant in cases the target has been separated from the seller's group in a reverse carve-out.
  • Transaction taxes: W&I insurance does not cover taxes related to the performance of the transactions. In light of the recent developments regarding Swiss securities stamp duty and the corresponding uncertainty, transaction taxes are an item to consider carefully, even if the parties take out a W&I policy.

Impact on tax due diligence

The W&I insurer regularly demands comprehensive tax due diligence to confirm the accuracy of the representations and warranties; lack of diligence results in an exclusion of liability under the W&I policy. Hence, the general best practice for tax due diligence reports becomes even more relevant in this situation:

  • The due diligence report requires a precise description and expert assessment of the risks. Often seen in practice but unsuitable in a W&I insurance context are generic recommendations like "to be addressed in the SPA".
  • The report should set out the considerations leading to the applied scope (and the exclusions) and materiality threshold. 
  • The language in the reports tends to be overcautious and to overstate the effective exposure. Instead, the focus should be on a fair and plausible assessment of the tax risks; otherwise, the buyer may not receive insurance coverage where he needs it the most.

In turn, expanding the scope to usually excluded matters (such as transfer pricing) may also help if the buyer wants to obtain coverage for these risks. 


Aligning transaction agreements with W&I coverage requires a profound understanding of both tax and (applicable) law. We also recommend discussing any potential W&I insurance coverage early in the tax due diligence process, so the report can be drafted in accordance with the demands of the W&I insurer.


We thank Kilian Bürgi for his valuable contribution to this article. 

About this article

By Marc Vogelsang

Senior Manager, International Tax and Transaction Services | EY Switzerland

Head Real Estate Transaction Tax, Swiss Certified Tax Expert and Swiss Attorney-at-Law. Supports clients in all M&A and real estate tax related questions as well as tax litigation | controversy.