Transaction security without seller reps and warranties: M&A transactions with synthetic W&I insurance

published on 13 August 2025 | reading time approx. 4 minutes

Synthetic W&I insurances are an integral part of today's M&A market, especially in transactions where the seller is unable or unwilling to provide any or only limited reps and warranties. It provides buyers with independent, insurance-based protection against economic risks and offers new possibilities in complex M&A structures.

Hedging transaction risks is of crucial importance in the M&A process. This is reflected in extensive reps and warranties catalogues in sale and purchase agreements (SPAs), in which the risk distribution between the parties is intensively negotiated and whose specific terms and conditions can often cause transactions to fail. The market responded with the use of W&I insurances, which enable risks to be transferred from the seller to the W&I insurer. This classic form of W&I insurance is based on the reps and warranties catalogue being negotiated between the buyer and the seller and protects the seller in the event that given reps and warranties are subsequently proven to be false. The W&I insurer may then be able to claim against the seller for any false statements.

The synthetic W&I insurance goes even further and offers insurance coverage for certain standardized reps and warranties without requiring the seller to give such reps and warranties in the SPA. The W&I insurer “synthesizes” the reps and warranties and makes them insurable regardless of the actual content of the SPA. This means that a completely synthetic reps and warranties catalogue is merely negotiated bilaterally between the buyer and the W&I insurer.

Typical scenarios

A synthetic structure is particularly suitable in situations where classic reps and warranties of the seller are not possible or only enforceable to a limited extent for legal, tactical, or practical reasons. Typical scenarios are:

Acquisition of an insolvent company: In a so-called distressed deal, which is usually structured as an asset deal, the insolvent company is often unable to provide any reps and warranties, or only to a rather limited extent. A synthetic W&I insurance closes this gap.
Secondary sales by financial investors: PE funds or other financial investors usually want to eliminate their liability completely.
Seller consortium: Institutional investors are often not involved in the target company's operational business and are therefore unable to provide profound reps and warranties.
Bidding process with high time pressure: Standardized, synthetic reps and warranties enable an efficient process without time-consuming negotiations with the seller on individual reps and warranties.

Requirements and limitations

A synthetic W&I insurance requires a comprehensive due diligence in accordance with market standards, even more so than classic insurance policies. The W&I insurer shall be able to form a detailed opinion on the target company, as it assumes the reps and warranties risks independently. As a rule, the buyer's due diligence forms the basis for the scope and depth of the insurance guarantees. The more detailed and structured the due diligence, the greater the W&I insurer's willingness to assume even more complex guarantees.

Despite its advantages, a synthetic W&I insurance does not cover all risks. As standard, known risks are excluded from insurance coverage, i.e., matters that are actually known to the buyer, including those that have been adequately disclosed in the due diligence reports. In this case, liability generally falls back on the seller. Details thereto – in particular the liability limit agreed for such cases – are usually set out in the SPA. Compliance violations, sanctions violations, corruption risks, tax risks in connection with transfer pricing issues, and issues outside the scope of due diligence are typically not insurable. However, W&I insurers often grant the option of waiving exclusions on the basis of a separate due diligence, for instance if a due diligence on transfer pricing issues has been carried out. As standard, “no leakage” guarantees are also completely excluded. However, there are a few providers who do not exclude this guarantee, which can be particularly relevant if there is a long period of time between the economic cut-off date and signing.

Furthermore, forward-looking statements, estimates, and forecasts (so-called “forward-looking guarantees”) have previously usually been excluded from insurance coverage, although our recent experience has shown that there are providers that are willing to insure such future circumstances in individual cases.

Market trend and legal classification

The German insurance market is becoming increasingly open to synthetic W&I insurance. International providers are entering the market and increasing competition, which has led to lower premiums and an expansion of insurable risks. The trend shows increasing professionalization and standardization of synthetic W&I insurance policies in an increasingly competitive M&A market. Fully synthetic insurance catalogues are now commonplace and, compared to previous years, no longer a rarity.

Legally, this is an independent insurance cover, although it is closely linked to the SPA. This means that early and close coordination between the draft of the SPA and the W&I insurance policy is essential. Finally, it should be noted that no taxes are generally payable on claims payments under a sell-side W&I insurance. However, the insurance costs are often passed on to the buyer via the purchase price, whereas claims payments from a buy-side W&I insurance are generally taxable for the buyer.

Conclusion

The synthetic W&I insurance offers innovative solutions for challenging M&A transactions – especially when traditional reps and warranties statements of the seller are not available. It provides buyers with protection against economic risks while facilitating a “clean exit” strategy for sellers. This may enable transactions that would otherwise not have been possible. For the parties and their legal advisors, this requires careful contract drafting and structural planning. An early and close coordination with the W&I insurer is essential in order to fully exploit the advantages of this form of insurance.