[Shourya Sharma and Nandita Yadav are students from the batch of 2027 at Jindal Global Law School, Sonipat and National Law Institute University, Bhopal, respectively]
The information asymmetry between buyers and sellers of a business or a company impacts risk distribution in mergers and acquisitions (“M&A”) or private equity (“PE”) transactions. Due diligence exists precisely to identify these potential risks. Section 124 of the Indian Contract Act of 1872 (“ICA”) provides that indemnity plays an essential role in addressing such information disparities by ensuring that the seller compensates the buyer for certain post-closing losses. While legal remedies can be sought under sections 73 and 74 of the ICA, parties often prefer negotiating indemnity clauses within their contracts as a way of ensuring certainty in recoveries on a dollar-for-dollar basis.
As a structural replacement embedded within risk management, warranty and indemnity (“W&I”) insurance allows the buyer to make recoveries for any losses incurred due to warranty violations from an insurance company without having to take legal action against the seller. The Sabka Bima Sabki Raksha (Amendment of Insurance Laws) Act, 2025recently increased the ceiling on India’s foreign direct investment limit in the insurance industry to 100%. This will facilitate the entry of foreign reinsurance firms into the country, which will naturally result in a wider scope for offerings of W&I insurance. Nevertheless, the official recognition of W&I insurance as a unique product offering by the Insurance Regulatory and Development Authority of India (“IRDAI”) is yet to occur.
Based on the experience in India and other countries with well-developed W&I insurance markets like the United States (“US”) and the United Kingdom (“UK”), this post explains how the traditional indemnity terms have been watered down by the use of nil recourse financing mechanisms. It also evaluates the effects of W&I insurance on the deal-making process, highlights the key lacunae in coverage in the context of emerging regulations in India, and demonstrates the need for proper due diligence.
The Rise of W&I Insurance and Shifting Risk Allocation
Indemnities serve as selective protection measures in M&A and PE transactions to counter the issues that arise from the risk assessment process during due diligence. While a product originally designed for use in select markets, W&I insurance has gained acceptance all around the globe. According to a study conducted in 2024 in the Asia-Pacific region, there was a record of 318 W&I policies issued involving 148 transactions that amounted to a 30% increase from 2023 at a cumulative coverage level of $7.8 billion. It also finds that in North America, approximately 18% of W&I policies are affected by claims where purchasers claim more through this insurance than what was done previously using indemnities under a share purchase agreement (“SPA”).
W&I insurance is an avenue for shifting risk from the promoter to the insurer. Under the traditional buy-side policy arrangement, the insurer will cover the buyer against the breach of warranty claims and will have little recourse against the seller except for fraudulent actions by the latter. Such an arrangement allows for effective recovery even in the scenario where the seller has dissipated the proceeds of the transaction while at the same time promoting rapid closings. The price of such an agreement, however, must be paid by the buyer in terms of premiums and transaction costs. The case of Ageas (UK) Ltd v Kwik-Fit (GB) Ltd & AIG [2014] EWHC 2178 (QB), the first recorded matter involving W&I insurance, demonstrates the mechanism working effectively. The buyer received compensation of £17.635 million for post-sale accounting discrepancies with more than half of that recovered (£12.6 million) from AIG under their W&I policy.
As far as the Indian market goes, the standard rate of premiums charged ranges anywhere between 1.5% to 3.5% of the amount insured, which is noticeably higher than the 2024 Asian average premium rate of 1.3%. Such a discrepancy stems from the complexity of the Indian taxation system, retrospective tax demands exemplified by the Vodafone and Cairn arbitration cases, new compliance challenges posed by the Digital Personal Data Protection Act, 2023 (“DPDP Act”) and the Labour Codes, along with lack of underwriter knowledge of Indian targets. Other than premiums, retentions and deductibles typically make up another 0.5% to 0.75% of the deal value, thus causing buyers to face losses from smaller breaches.
The Transition to Minimal Seller Recourse and its Impact on Deal Structuring
With W&I insurance in play, deal terms have tilted to favour nil recourse for sellers. Recent studies show a sharp increase in deals with “no survival” of seller warranties, meaning the seller has no post-closing liability for breaches, absent fraud. According to a 2025 study, fully 33% of private deals in 2024 were structured as true “walk-away” deals with no seller survival on general representations. Remarkably, the trend towards no seller recourse has transcended into deals without W&I insurance as well. The same study also notes that in 2024, 18% of deals without W&I insurance still gave the seller a walk-away with no indemnities, a 50% jump from the prior year. The result is that the seller’s liability can be capped at a nominal amount, which is effectively negligible compared to what is recovered from insurance. Indeed, in many developed markets it is now the norm to structure deals as “nil recourse” capping the seller’s indemnity exposure to a token $1, with W&I insurance covering the rest. This demonstrates that there is a general shift in market practices where buyers are willing to accept weaker indemnities even when uninsured. This movement is best explained not by buyer’s indifference to warranty risk, but by the evolving bargaining economy in deals. Buy-side W&I lets buyers recover from the insurer instead of suing the seller, reduces buyer risk, and gives sellers a clean exit. This is especially attractive in competitive auctions. Consequently, sellers now use nil recourse as a negotiating baseline and buyers come to accept the same more frequently.
With low to nil post-closing liabilities, sellers have little incentive to resolve the issues associated with the representation and warranties, which can cause investors to be more cautious about their decisions since they have to bear the cost of any breaches flowing from therein. As buyers expect higher post-closing liability as opposed to sellers, they can use the price of a transaction as a bargaining tool. This can be done by reducing the value of the acquisition, reduced multiple, or price adjustment. Over time, this can depress valuations and make corporate fundraising difficult, as investors price transactions higher for bearing future risks and uncertainty.
Another market phenomenon that contributes to the aforementioned decrease in buyer security is the increase in the number of management buyout (“MBO”) transactions globally. For example, in India’s private equity market, the number of transactions that are considered to be buyouts, including MBOs, has sharply grown from around 15% in 2014 to almost 50% in 2024. It shows that the number of buyouts conducted by private equity funds is significantly growing. Since promoters prefer clean exits and low post-closing liabilities, it indicates that MBO transactions are usually carried out based on the principle of no recourse or limited recourse.
Exclusions and Gaps in W&I Insurance
While W&I insurance has grown popular, there are critical gaps and exclusions that leave certain risks squarely on the buyer. Typically, W&I policies contain a host of exclusions that must be negotiated carefully while entering into transaction documents such as the SPA. For example, insurers generally exclude any known issues and matters revealed in due diligence through disclosures. But beyond that, insurers often carve out whole categories of risk from coverage according to market practice. Common exclusions include environmental contamination, product liability, certain tax matters, and crucially any losses relating to bribery or corruption violations. In fact, a buyer frequently asks for coverage of anti-bribery compliance warranties, only to find insurers refuse these areas as they typically fall under blanket exclusions. In the absence of any Indian judicial precedents on W&I insurance, it becomes pertinent to analyse judicial trends in other jurisdictions.
The UK case Finsbury Food Group Plc v AXIS Corporate Capital UK Ltd & Ors [2023] EWHC 1559 (Comm)illustrates the hurdles policyholders face. Finsbury acquired Ultrapharm, a gluten-free bakery, for £20,000,000 under an SPA backed by a buyer-side W&I policy. It later claimed that undisclosed recipe changes and price reductions to its key customer, Marks and Spencer plc, amounted to a material adverse change, breaching the seller’s warranties. The Court found no breach, since both changes pre-dated the warranty period. It further held that even if a breach had occurred, the buyer’s actual knowledge of the relevant circumstances would have triggered the knowledge exclusion in the policy, and that Finsbury would have paid the same £20,000,000 regardless, meaning no loss was caused. The case establishes that W&I insurance is not a remedy for a bad bargain or light-touch due diligence, and that causation and the buyer’s actual knowledge are central to any recovery.
Another example that clearly shows the limited ability of an investor to obtain redress is Project Angel Bidco Ltd (In Administration) v. Axis Managing Agency Ltd & Ors [2023] EWHC 2649 (Comm), which was appealed in the Court of Appeal [2024] EWCA Civ 446. In this case, the investor accused the target company of violating its anti-bribery compliance warranty and claimed compensation based on the W&I insurance policy, since the SPA offered no recourse on sellers. However, the insurance company referred to an exclusion clause stating that the policy did not cover “any anti-bribery and corruption liability.” Both the lower and appellate courts found in favour of the insurance company and ruled that even though the anti-bribery warranties were stated to be “covered” in the schedule of the policy, the more broadly drafted exclusion clause in the policy itself prevailed. Neither court chose to remedy the so-called mistake in the wording made by the purchaser, thus reiterating that courts tend to avoid altering commercial agreements.
The upshot here is that indemnification remains a remedy of last resort for high-risk industries that do not offer W&I insurance. While there may be some exceptions, for instance, the removal of the anti-bribery exclusion clauses by certain Asian insurers on a per-region basis, fraud, intentional non-compliance, and any other penalties remain generally uninsurable. The situation is particularly acute in India, where the introduction of several comprehensive compliance regimes, including the DPDP Act and the Labour Codes, imposes heavy penalties for non-compliance, which need to be evaluated carefully during due diligence. In one example, the violation of section 70 together with section 86 of the Industrial Relations Code, 2020 can result in a fine of up to INR 1,00,000 for wrongful retrenchment. These costs cannot be covered by W&I insurance because insurers view them as uninsurable, or the insurer knows about the risk from due diligence processes. As India moves closer to adopting a strict compliance regime, buyers will need to ensure their protection through indemnification or pricing adjustment.
Conclusion
Legal due diligence has evolved from being merely an administrative requirement to become a pivotal tool for managing risks and preserving value in modern-day corporate deals. In a climate that is typified by lesser promoter liability, increasing regulation such as by DPDP and Labour Codes and increased reliance on W&I insurance, the outcome of due diligence exercises now plays a significant role in influencing the terms of pricing, structuring, and risk allocation. While indemnities may have constituted the primary investor protection measure against diligence risks until now, this trend has been significantly impacted by nil recourse agreements and insurance-based exit mechanisms, which have moved the risk burden to the buyer to a greater extent. Therefore, a thorough legal due diligence, supplemented by appropriate indemnities, insurance coverage, and valuations, continues to be imperative for preserving investor protection and commercial viability of deals in India.
– Shourya Sharma & Nandita Yadav