W&I insurance moves beyond large M&A deals and gains ground in smaller transactions

Lower pricing, broader coverage and increasing market specialisation are driving this trend, according to discussions at TRI Day Madrid, organised by Clyde & Co.

Warranty and indemnity (W&I) insurance, traditionally associated with large mergers and acquisitions (M&A), is increasingly being used for smaller transactions that, until just a few years ago, had limited access to this type of cover. Lower pricing, greater policy flexibility and increasing market specialisation are supporting this expansion.

This was one of the key trends discussed at TRI Day Madrid, organised by Clyde & Co on Wednesday 21 October at the Hotel Orfila in Madrid. The event brought together around 90 professionals from insurers, managing general agents, brokers and law firms for three panel discussions covering developments in the W&I market, claims management, the growth of tax insurance and the outlook for these products in Spain and Latin America. 

“Transactional risk insurance was once a highly specialised product used for large deals. Today, it has effectively become a standard tool in almost any M&A transaction,” said Miguel Relaño, Co-Managing Partner of Clyde & Co in Spain. Solutions are now available for transactions below €100 million and even for acquisitions worth around €1 million or less. 

Competition has also driven greater underwriting flexibility and broader coverage. Discussions at the event explored how the market is offering solutions for transactions involving complex corporate structures, environmental risks and assets whose principal value lies in intellectual property. 

Artificial intelligence is also beginning to play an important role in this process. Its use can automate document analysis, speed up information reviews and reduce the resources needed to assess certain risks. However, participants stressed that these tools do not replace professional judgement, which remains essential when assessing risk. 

The growth of W&I in Spain has been accompanied by the increasing maturity of the product, which has been present in the domestic market for approximately a decade and has become significantly more widely used in recent years. 

The increase in notifications in recent years has helped build practical experience of how policies operate and respond. There has also been greater use of precautionary notifications and increasing specialisation among professionals involved in handling claims. 

Among the main challenges are establishing the causal link between a breach of warranty or representation and the resulting financial loss, as well as quantifying damages. These issues become particularly complex in claims involving loss of profits or the use of business valuation multiples. 

These challenges are compounded by differences between Spanish law and the Anglo-Saxon legal systems from which many of these policies originate. Against this backdrop, the development of specialist teams in Spain that can manage claims with direct knowledge of the applicable legal framework is becoming increasingly important. 

The event also highlighted the importance of effective communication between insureds, brokers and insurers from the earliest stages of a claim. Providing accurate information, identifying potential breaches and properly substantiating losses are key factors in facilitating resolution.

It was also noted that there are currently no Spanish court judgments concerning claims arising from W&I insurance. This is partly explained by parties' tendency to resolve disputes through settlement and the frequent use of arbitration.

Tax insurance gains ground beyond M&A transactions

Another central topic was the development of tax insurance, a solution that enables the financial consequences of certain uncertain tax contingencies to be transferred to an insurer. Although the product was initially closely associated with corporate acquisitions and investment fund transactions, its use is growing outside the transactional context.

This development is being driven, among other factors, by the desire for greater certainty in situations where taxpayers and tax authorities may take different interpretations of tax rules. However, for a contingency to be insurable, there must be a technically defensible legal position and the risk must be defined with sufficient precision.

The experts also discussed the importance of defining coverage appropriately. This can include the tax liability being claimed, interest, certain penalties and defence costs, as well as, depending on the policy terms, mechanisms that prevent the insured from having to advance funds during a dispute with the tax authorities. 
The Spanish market is beginning to see the first claims arising from these policies. Coordination between taxpayers, their tax advisers, brokers and insurers, together with a clear definition of the insured contingency, is particularly important in avoiding disputes during the claims process. 

Overall, TRI Day Madrid highlighted the maturity of Spain's transactional insurance market. The evolution of coverage and increasing specialisation in claims management demonstrate the sector's ability to adapt to businesses' needs and offer solutions that are increasingly tailored to their transactions.