However, a significant matter that often arises in W&I-backed transactions is how the parties will be protected in areas usually outside the scope of such insurance. For example, in an indemnification-backed deal, the only exceptions to representations and warranties provided by the seller or target are usually the contents of disclosure letters.

Insurers, however, exclude from the scope of W&I cover, not only matters covered in disclosure letters, but also disclosures in the data room and due diligence reports. One way to ensure that W&I coverage emulates traditional seller or target indemnities is to obtain a due diligence/data room scrape/enhancement. If such scrapes, or enhancements, are obtained, insurers will not automatically exclude disclosures that are contained in the data room/due diligence reports. This helps in taking the coverage in a W&I-backed deal closer to what is offered in an indemnification-backed deal.

It should be borne in mind that such exclusions have their limitations. Insurers usually require an insured to provide a no claims declaration that they have read and understood the contents of any due diligence reports at the time a policy is taken out. It is unclear how insurers will process a claim if there is a difference between the disclosure letter and the due diligence reports, even if such an exclusion clause is included in the policy.

W&I has a number of other key advantages in terms of enhancements and scrapes. These may make the cover in a W&I-indemnified deal better than a traditional indemnification-backed package. For example, in most indemnification-backed deals, sellers often attempt to exclude indirect or consequential loss, loss of profit and diminution in the value of shares from the extent of indemnifiable losses. Insurers, on the other hand, are at times willing to cover such losses as an enhancement.

Another enhancement to be considered by parties in a W&I-indemnified transaction is a materiality scrape. The effect of such a provision is that insurers will read down a warranty in the share purchase agreement that includes a materiality qualifier as if no such materiality qualifier exists. From the perspective of the insured, this reduces subjectivity, allowing the insured to claim for a breach without having to prove whether such a breach was material. On the other hand, insured parties should be aware that, irrespective of a materiality scrape, the excess for making claims will still apply. Any loss may be claimed only if it is more than the excess and retention amount.

Another enhancement that is often considered with regard to W&I transactions is the knowledge scrape. Similar to a materiality scrape, its effect is that insurers will read down a warranty in a share purchase agreement that has a knowledge qualifier as though no such qualifier exists. Although this may seem appealing at first, an insured should be aware that insurers usually apply such a scrape on a warranty-by-warranty basis and often do not cover the entire liability for such warranties under this scrape.

Although W&I scrapes and enhancements are useful and are attractive at first, as with everything else, they come at a price. This takes the form of additional premiums. The amounts of such an added expense vary from insurer to insurer and depend on the insurance broker involved. The parties should consider whether the risks that are sought to be mitigated when obtaining such enhancements are worth these additional costs.

This article was originally published in India Business Law Journal on 5 September 2025 Written by: Karun Prakash, Partner. Click here for original article

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