The unknown unknown
In recent years, there has been a noticeable rise in popularity of using a W&I insurance policy on "corporate wrapped" real estate transactions. Providing a perceived "security net" for both sellers (wanting a clean exit with limited ongoing liabilities and enhanced investment returns) and buyers (faced with sellers unwilling to provide a substantial or sufficient level of cover), the W&I policy has become a standard feature of the market. As a result, many auction sales require purchasers to detail its proposals on W&I insurance as part of their bids.
While both sell-side and buy-side policies are available, the buy-side policy has become the market norm as sellers seek to achieve a "clean break". However, in experience, the scope of coverage under buy-side policies is commonly misunderstood; perhaps too often we have seen the concept of a buy-side W&I insurance policy and £1 cap on seller liability agreed at heads of terms without a full understanding of the holes in the security net, particularly in relation to tax exposures.
In some circumstances (for example, where the seller has agreed to pick up all or part of the cost of the insurance), the seller may have already started the ball rolling with insurance brokers and agreed a price based on a particular scope of cover. In such circumstances, it is unlikely that the terms of the policy agreed by the seller will match the requirements of the buyer, meaning that further (often lengthy) negotiations with the seller in relation to the gap are common.
This short briefing note seeks to clarify the typical features of a buy-side W&I insurance policy; the advantages and disadvantages of using buy-side W&I insurance in the context of real estate investment; and highlights the current market position on the key terms of the policy.