Representations, warranties and indemnities allocate risk in every acquisition, but they are only as good as the person standing behind them. Once a seller has taken the sale proceeds and dispersed, a warranty claim can be worth little. Warranty and indemnity insurance has moved from exotic to mainstream in Indian deals precisely to close that gap.
Every share or asset purchase agreement rests on a bargain about risk. The seller makes representations and warranties about the state of the business, that the accounts are true, the licences are valid, the litigation is disclosed, the tax is paid, and backs specific known risks with indemnities. The buyer prices the deal on the faith of those statements. But a warranty is a promise, and a promise is only as valuable as the promisor's ability to honour it. The structural weakness of the traditional model reveals itself after completion, when the seller has distributed the proceeds and is no longer a substantial covenant.
The anatomy of the protection is worth stating precisely, because each element is a negotiated limit. Warranties are qualified by a disclosure schedule, through which the seller carves out what it has revealed; they are then bounded by financial limits, a cap on aggregate liability, a basket or threshold below which claims cannot be brought, de minimis limits that screen out trivial claims, and survival periods after which warranties expire. Specific indemnities sit alongside, addressing identified risks pound-for-pound rather than through the warranty machinery. The net effect is that a buyer's theoretical recovery is already narrower than the headline warranties suggest, before collectability is even considered.
Collectability is the gap that warranty and indemnity insurance is built to fill. The product transfers the risk of a warranty breach from the seller's covenant to an insurer's balance sheet, so that a buyer can claim against a policy rather than chase a dispersed seller, and a seller can achieve a cleaner exit with less of the proceeds locked up in escrow. Once a feature of large cross-border transactions, buyer-side W&I cover has become a mainstream feature of Indian M&A and private-equity exits, where funds in particular want to return capital to investors without leaving a long warranty tail hanging over the distribution.
The protection is real but bounded, and the exclusions are where expectations must be managed. W&I policies do not cover everything: known issues, matters fairly disclosed in diligence or the disclosure schedule, are excluded precisely because insurance is for unknown risk, not for risk the parties already see. Forward-looking warranties, purchase-price adjustments, and certain inherently uninsurable exposures typically fall outside cover, and specific known liabilities are usually dealt with by a dedicated indemnity or a price reduction rather than by the policy. A buyer that assumes the policy is a universal backstop will discover its limits at the worst possible moment.
The drafting consequence that is most often missed is the need to reconcile the policy with the contract. The caps, baskets and survival periods in the sale agreement, and the way the warranties are qualified, must line up with what the policy will actually pay; a mismatch between contractual liability and insured liability leaves a buyer exposed in the very space it thought it had covered. Equally, the insurer's appetite is shaped directly by the quality of the diligence: thorough, well-documented diligence narrows exclusions and lowers cost, while thin diligence widens exclusions, because the insurer will not underwrite what the buyer did not bother to investigate.
That last point reframes what the product is for. W&I insurance rewards disciplined diligence; it does not replace it. Used well, it lets a buyer complete with confidence and a seller exit cleanly, with the residual risk of honest mistakes carried by an insurer rather than by a strained post-closing relationship. Used as a substitute for investigation, it simply shifts the argument from the seller to the insurer. Structuring the diligence, the warranty package and the policy so that the three reinforce one another, rather than leaving gaps between them, is how AMLEGALS makes warranty and indemnity cover do real work in an Indian deal.
