Warranty and Indemnity Insurance in German Deals

Warranty and indemnity insurance in German deals: the essentials

Warranty and indemnity insurance (W&I insurance) covers losses arising from breaches of the guarantees a seller gives in a share or asset purchase agreement, and often from specific tax indemnities. In German transactions it has become a standard tool, particularly in private equity exits and auction processes, because it allows a seller to exit with a low liability cap while the buyer still has a creditworthy party to claim against. The policy does not replace the purchase agreement: it follows the guarantee catalogue in the SPA, but only within its own scope, exclusions and financial limits. Understanding how the policy and the German SPA interact is therefore essential for both sides.

This briefing explains the structure of W&I policies, typical exclusions, how knowledge qualifiers and German statutory rules fit in, retention and de minimis amounts, and how claims are handled.

Buy-side and sell-side policies

Almost all W&I policies in German deals are buy-side policies: the buyer is the insured and claims directly against the insurer. The seller's liability under the SPA is typically capped at a small amount, sometimes at a nominal EUR 1, or limited to the retention. A sell-side policy, in which the seller insures its own liability, is rare, because the buyer then still has to pursue the seller first.

The insurer usually waives its right of subrogation against the seller except in cases of fraud. Under § 86(1) of the Insurance Contract Act (Versicherungsvertragsgesetz, VVG), a claim of the insured against a third party passes to the insurer to the extent the insurer pays. Without a waiver, the insurer could recover against the seller, which would defeat the purpose of a clean exit. The waiver and its fraud carve-out should be reflected both in the policy and in the SPA.

How German SPA guarantees fit the policy

German SPAs do not rely on the statutory warranty regime for defects in the Civil Code, which is poorly suited to company acquisitions. Instead, the seller gives independent guarantees (selbständige Garantieversprechen) under § 311(1) BGB with a contractual remedy regime, and excludes statutory claims as far as legally possible. This structure matters for warranty and indemnity insurance in three ways:

• The policy follows the guarantees. The insurer reviews the guarantee catalogue and may decline to cover individual guarantees, or cover them only in a "deemed" amended form, for example with an added knowledge qualifier.
• Remedies. German SPAs usually provide for restitution in kind first, then compensation in money. Policies cover the insured's loss as defined in the policy, which may differ from the SPA definition, for example on indirect damages or multiplied losses.
• Mandatory law. Liability for intent cannot be excluded in advance (§ 276(3) BGB), and a seller cannot rely on exclusions where it has fraudulently concealed a defect or given a guarantee (§ 444 BGB). Fraud claims therefore remain against the seller, which is why the insurer's subrogation waiver carves out fraud.

Buyers should also check how the SPA deals with their own knowledge. Under § 442(1) BGB, a buyer that knows of a defect when the contract is concluded loses its statutory rights, and German SPAs often contain a contractual knowledge exclusion as well. W&I policies exclude matters actually known to the buyer's deal team, typically defined as a list of named individuals. Coordinating the SPA knowledge clause with the policy definition avoids gaps.

Scope and typical exclusions

A standard warranty and indemnity insurance policy covers unknown breaches of the guarantees that occurred before signing or, if the guarantees are repeated, between signing and closing. Typical exclusions are:

The insurer's underwriting relies on the quality of the buyer's due diligence. Insurers read the legal, financial and tax due diligence reports and hold an underwriting call. Areas where due diligence was limited or red-flag only are often excluded. A well-structured report that addresses each guarantee area helps to achieve broad cover.

Retention, de minimis and policy limits

The financial structure of warranty and indemnity insurance follows a familiar pattern, although the figures depend on market conditions, target size and sector:

• Policy limit: a percentage of the enterprise value, often chosen by the buyer to balance premium and protection. Fundamental guarantees on title and capacity may have a higher limit, sometimes up to the purchase price through additional layers.
• Retention: the amount of loss the buyer bears before the policy pays. It may "drop down" after a certain period. Where the seller's cap equals part of the retention, the seller bears that part.
• De minimis: individual claims below a threshold are disregarded. The SPA and the policy should use the same figures.
• Policy period: commonly longer for fundamental and tax guarantees than for general business guarantees. German limitation rules in the SPA should be aligned with the policy period.

Negotiating the policy: enhancements and interim breaches

Policy wordings are negotiable, and brokers and advisers routinely seek enhancements. The most common points in German deals are:

• Materiality scrape. The policy disregards materiality qualifiers in the guarantees when calculating loss and sometimes when determining whether a breach occurred. Sellers often resist a full scrape in the SPA, but the insurer may accept a scrape in the policy alone, which benefits the buyer.
• Knowledge scrape. Some insurers agree to disregard the seller's knowledge qualifiers ("to the seller's knowledge") for the purposes of the policy, effectively converting knowledge-qualified guarantees into unqualified ones for insurance purposes.
• Synthetic guarantees. In distressed sales or where sellers refuse to give guarantees, for example an insolvency administrator selling assets, some insurers offer cover on guarantees negotiated only between buyer and insurer. The scope is usually narrower and the premium higher.
• Loss definition. Whether consequential losses, lost profits and multiplied losses based on valuation are covered.
• Disclosure. Whether the entire data room counts as disclosed, or only specific disclosures against individual guarantees.

Where signing and closing are separated, for example because merger control or investment screening clearance is required, the seller usually repeats some or all guarantees at closing. Policies typically cover breaches that first occur between signing and closing, but exclude breaches that the buyer learns of before closing ("new breach, new knowledge"). The buyer should therefore consider whether the SPA gives it a walk-away right or a specific indemnity for interim breaches that become known before closing, because the insurer will not pay for them.

Finally, premiums, broker fees and insurance tax are a deal cost. In German auction processes, sellers sometimes agree to share the premium as part of their price negotiation, and the SPA should allocate these costs expressly.

Claims under warranty and indemnity insurance

Claims practice is where warranty and indemnity insurance proves its value. The policy sets out notification duties: the insured must notify circumstances that may give rise to a claim within a set period and keep the insurer informed. Under German insurance contract law, breaches of such obligations (Obliegenheiten) can reduce or exclude cover depending on fault, so notification deadlines should be diarised from closing.

Typical claims involve tax reassessments after an audit, undisclosed liabilities, inaccurate financial statements, IP ownership issues and breaches of compliance guarantees. Loss quantification is often the main dispute, particularly where the buyer argues that a breach reduces the value of the company by a multiple of the annual earnings effect. Policies vary on whether they accept multiplied losses. Claims under the policy are resolved by negotiation, and failing that by the dispute resolution forum in the policy, which may differ from the SPA forum. Our article on post-M&A disputes under German SPAs covers claims against sellers.

Where the seller remains liable for part of the loss, for example for a specific indemnity or within the retention, the buyer may face parallel processes against the seller and the insurer. Consistent claim notices and a single factual narrative are important.

Illustration: a hypothetical private equity seller sells a German software company. The SPA caps the seller's liability for business guarantees at EUR 1 and provides a specific indemnity for a known tax audit issue. The buyer takes out a buy-side policy with a limit of a share of the enterprise value, a retention that drops down after twelve months and a materiality scrape. When a licensing defect emerges after closing, the buyer notifies the insurer within the policy period and recovers under the policy, while the tax audit issue is claimed against the seller under the indemnity.

When W&I cover makes sense

Warranty and indemnity insurance is most useful in auctions, in private equity exits where the fund needs to distribute proceeds, in deals with many individual sellers such as founders and management, and where the buyer wants to preserve a relationship with sellers who stay in the business. It is less attractive where the main risks are known issues, which the policy excludes, or where the deal is too small for the premium and underwriting effort to be proportionate. Sellers should consider a "stapled" policy, prepared by the seller and offered to bidders, to make bids more comparable and speed up the auction.

Warranty and indemnity insurance also interacts with the pricing mechanism. In a locked-box deal, leakage claims remain against the seller; in completion accounts, adjustments are not insured. See our explainer on locked box vs completion accounts.

How TRW & Co helps

We advise buyers and sellers on warranty and indemnity insurance in German transactions. We draft SPA guarantee catalogues that work with W&I cover, prepare due diligence reports suitable for underwriting, review policy wordings against the SPA, negotiate exclusions and enhancements with insurers and brokers, and support insured buyers in notifying and pursuing claims. Our private equity and M&A teams handle the transaction, while our disputes lawyers support claims. Contact us to discuss W&I insurance in your transaction.