Risk Partners Life Sciences Roundtable 2025, thank you very much!
Risk Partners Life Sciences Roundtable 2025, thank you very much!
If the seller or management is unable or unwilling to provide a viable warranty schedule, the warranty schedule will not be carried over from the SPA into the policy. Instead, it will be negotiated as a standalone, policy-based warranty schedule between the buyer, advisors, and the insurer. The policy thus establishes a separate coverage mechanism for unknown warranty breaches. As a result, the warranty schedule must be consistent with the due diligence, the transaction structure, and the claims mechanism.
Distressed M&A
In insolvency and restructuring situations, operational guarantees are typically not provided, or are provided only in a greatly reduced form. Insolvency administrators, trustees, secured creditors, or financing banks in lender-led dispositions typically do not wish to create a liability position that goes beyond fundamental issues of disposition, title, or representation. Even liability limited to a nominal amount of 1 EUR does not completely resolve the issue, because the insurer’s rights of recourse in cases of fraud or deceit are typically not fully excluded. Even outside of insolvency—for example, in a turnaround acquisition prior to StaRUG proceedings or in the case of a seller with a hollowed-out balance sheet—there is often no guarantor who provides a viable liability source for the standard liability period.
From the seller's perspective, this structure can broaden the pool of bidders without requiring insolvency administrators, trustees, or creditor stakeholders to assume operational seller guarantees.
For buyers, this is not just a financial risk. Financial investors, lenders, and institutional investors, in particular, often require transparent assurance regarding key warranty areas for their investment committees, financing, or internal governance. If there is no seller liability whatsoever, this can not only make the acquisition more expensive but also complicate the approval of the transaction as a whole.
Synthetic W&I without Distress
Synthetic structures are no longer a phenomenon limited to distressed transactions. Increasingly, even solvent sellers in strategically managed processes are refusing to provide a comprehensive set of warranties in order to shorten negotiations, attract a larger number of bidders, or achieve a true clean exit without residual liability. This applies in particular to private equity exits, carve-outs from corporate structures, and secondary transactions, in which the financial seller has no operational knowledge of the target company and therefore cannot provide a reliable warranty.
Synthetic structures are often easier to assess for assets with a clearly definable risk profile and a manageable set of guarantees, such as real estate, infrastructure, or renewable energy transactions. The more operational, international, and labor-intensive the target is, the more its insurability depends on the scope and quality of the buyer’s due diligence.
Synthetic W&I does not replace coverage for known turnaround or restructuring risks. Known tax, insolvency, accounting, or litigation-related risks are generally excluded from W&I coverage. If they can be sufficiently defined in legal and economic terms, they may be addressed—depending on the type of risk—through tax liability insurance, specific indemnity insurance, contingent risk insurance, or litigation/ATE structures. Synthetic W&I, on the other hand, takes a different approach: The list of warranties itself does not originate from the SPA but is agreed upon with the insurer on a policy basis and thus applies even if seller warranties are missing, reduced, or cannot be provided in a way that is economically viable.
Compared to traditional W&I insurance: In a standard policy, the insurer covers a list of warranties negotiated by the parties in the SPA. In a synthetic policy, this reference point does not exist. The list of warranties is negotiated directly between the buyer (or the buyer’s advisors) and the insurer and forms part of the policy, not the SPA. A distinction is made between fully synthetic (the SPA contains no warranties; the entire list is set forth in the policy) and partially synthetic (the SPA contains a reduced core set of warranties, supplemented by additional, exclusively policy-based warranties).
Compared to Tax Liability Insurance / Synthetic Tax Indemnity: Tax risks can be covered in a synthetic W&I structure through tax warranties or a synthetic tax indemnity, provided they relate to unknown pre-closing tax liabilities and have been sufficiently reviewed through tax due diligence. Identified tax items, transaction taxes, or specific tax disputes, on the other hand, should generally be addressed separately through tax liability insurance or a specific indemnity solution.
Regarding title insurance: A synthetic W&I policy does not replace a title search. With respect to GmbH shares, Section 16(3) of the German Limited Liability Companies Act (GmbHG) provides protection only within its narrow scope; in particular, it does not automatically remove encumbrances, restrictions on disposal, or provisional transfers subject to a condition precedent. For leveraged or distressed targets, security interests, liens, share pledges, consent requirements, and release mechanisms must therefore be addressed separately through legal due diligence, SPA provisions, and, if applicable, title insurance.
The difference from a standard W&I transaction is that there is no traditional disclosure letter—for which the seller is responsible—in relation to a list of warranties in the SPA. The underwriter therefore relies on the buyer’s due diligence, the VDR, the Q&A, and, where applicable, the vendor’s due diligence, legal, and tax fact book, as well as on a comparison between the synthetic list of warranties and the information that has actually been reviewed.
| Parameters | Design |
| Policyholder | Buyer (Buy-Side) |
| Warranty Catalog | Fully or partially policy-based, negotiated between the buyer/advisors and the insurer. |
| Damage Mechanics | Must be coordinated with the purchase price mechanism prior to the transaction, particularly with regard to the enterprise value/equity value bridge, leakage, debt/cash, working capital, de minimis, basket, retention, and the allocation of benefits or cash flows. |
| Disclosure Mechanism | References to appendices/disclosure schedules are replaced by references to the virtual data room (VDR) or specific VDR folders. Since the VDR is thus itself part of the underwriting and disclosure mechanism, a “non-disclosure of VDR” structure is generally not available for synthetic guarantees. |
| Effective Date of the Guarantees | Synthetic warranties typically apply at the signing stage. They can only be reinstated at closing if a separate bring-down, Q&A, or no-claims mechanism is agreed upon. For title warranties, a different solution may be possible depending on the transaction structure and the insurer’s appetite. |
| Knowledge Concept | Warranties that are qualified under “Seller’s Knowledge” and for which no “Knowledge Scrape” is offered, or that are deemed to be knowledge-qualified for the purposes of the policy, are not insurable on a synthetic basis. |
| Underwriting Process | Sometimes required: a brief Q&A with the (asset) management team by the buyer 1–2 days before signing, depending on the insurer. |
| Deductible / De Minimis | Often above the standard W&I level or less flexible; depending on the depth of due diligence, risk profile, sector, and the insurer’s appetite. |
| Bonus | For purely synthetic structures without specific distressed or complexity drivers, coverage is often close to the standard W&I level; for distressed-driven deals or cases where insurers have limited appetite, coverage typically includes an uplift. |
| Subrogation against the Seller | Generally limited to fraud or willful misconduct; often economically insignificant if there is no liable party with assets. |
| Underwriting Basis | Buyer due diligence; synthetic warranties refer to specific VDR folders rather than SPA disclosure schedules. |
The insolvency administrator typically sells the business operations without operational guarantees; any remaining commitments are typically limited to authority to dispose of assets, title, power of attorney, or a few transactional bases. The synthetic policy creates an independent right to coverage for the buyer with respect to the policy-based list of guarantees, based on the buyer’s due diligence, the data room, and, if applicable, the Q&A.
In share deals involving self-administration or protective shield arrangements, the seller remains capable of acting but is bound by procedural requirements and is often not a viable party to hold liable from an economic standpoint. A partially synthetic structure can supplement a narrowly defined core set of SPA warranties with policy-based warranties.
Financing banks manage the liquidation of a non-performing loan and sell it without assuming any guarantees. The policy provides the buyer with an independent coverage mechanism if the economically controlling lender is unwilling or unable to assume seller guarantees.
The seller still exists but, given its financial position, cannot provide a valid guarantee. Synthetic elements can create an independent insurance claim without making the purchase contingent solely on the seller’s financial capacity.
The financial seller has no operational knowledge of the target company and, accordingly, does not provide a verifiable list of warranties. A synthetic structure makes the buyer’s due diligence the central basis for underwriting when the seller or management does not provide a viable list of operational warranties.
A fund nearing the end of its term aims to fully liquidate its portfolio and distribute the proceeds to investors. A multi-year extended liability, an escrow arrangement, or a substantial retention often conflict with the goal of liquidation. Synthetic W&I can partially assume the economic function of seller liability and provide the buyer with a direct insurance claim without requiring the fund to be maintained as a viable liability entity beyond the liquidation process.
When there are a large number of co-shareholders—such as communities of heirs, widely dispersed minority shareholders, or a large number of co-investors—it is often impossible to identify a single party that is able or willing to provide binding guarantees for the entire company with sufficient knowledge. A synthetic structure does not eliminate this coordination problem on the seller’s side, but it can provide the buyer with an independent right to coverage against the insurer.
To make a reliable market assessment, the insurer needs not only access to the SPA and VDR, but also a verifiable comparison between the warranty schedule and the scope of due diligence. Of particular relevance are the transaction type, the status of the proceedings, drafts of the SPA and insurance policy, the VDR index, legal/financial/tax due diligence reports, the Q&A log, the legal/tax fact book or vendor due diligence, evidence of authority to dispose of assets, any approvals and consents, documents regarding collateral and releases, as well as a proposal for handling the signing and closing period.
The later the warranty schedule, the VDR-Scope, and the Q&A process are coordinated, the higher the risk that the insurer will underwrite only a reduced warranty schedule shortly before signing, or that the closing process can no longer be finalized in time. It therefore makes sense to involve the insurer no later than when it becomes apparent that the seller will not provide a warranty catalog in line with market standards or the due diligence scope has not yet been finalized.
With synthetic W&I, underwriting eligibility—not price—is the primary factor. Only a limited number of insurers underwrite warranty packages without seller liability. This results in a sequence that is often reversed in practice: The warranty catalog should be derived from the already commissioned DD scope, not the other way around. Anyone who first drafts a comprehensive catalog according to their wishes and then hopes to adjust the due diligence scope accordingly is negotiating for a policy that the insurer will trim down to the actual due diligence scope during underwriting anyway—resulting in a corresponding loss of time shortly before signing. When comparing multiple insurers, therefore, the relevant difference lies less in their general risk appetite and more in the question of how much coverage an insurer is actually willing to underwrite for a given due diligence scope.
In the case of smaller distressed transactions, there is another factor to consider: The level of due diligence required for a synthetic policy must be economically commensurate with the transaction volume. A low purchase price does not automatically justify a reduced due diligence standard. For the insurer, the decisive factor remains whether the scope of coverage has been sufficiently reviewed and documented. If the budget for legal, tax, financial, or technical due diligence is too tight, the basis for underwriting is lacking; in that case, the policy itself is not the real problem.
In addition, the claims mechanism must be established before the transaction becomes binding. Because the warranty schedule is not mirrored in the SPA, the balanced liability structure—comprising seller warranties, liability limitations, and purchase price mechanisms—that is typically found there is often missing. No one automatically fills this gap in the event of a claim. In practice, this is evident in the fact that the policy and the purchase agreement may treat the same set of facts differently: An economic disadvantage may already be accounted for in the purchase price through working capital, leakage, debt-to-cash ratios, or a specific purchase price adjustment, yet it is additionally asserted as a breach of warranty under the policy; or, conversely, it remains unclear whether a loss still falls under the insured definition of loss despite the adjustment mechanism in the purchase agreement. If this overlap is not clarified before the policy is issued, a conflict regarding valuation and allocation will arise in the event of a claim.
Another critical issue is the timeline. Synthetic guarantees are typically insured only up to the signing date. Coverage through closing requires an additional bring-down, Q&A, or no-claims mechanism and is not a given, especially in distressed transactions. In the event of a longer interim period, a decision must therefore be made before committing to the deal as to whether this risk will be accepted, mitigated contractually, or negotiated separately with the insurer.
This solution is particularly relevant for distressed and special-situations investors, private equity and distressed debt funds, strategic buyers in restructuring processes, insolvency administrators, trustees, and self-administration bodies, participants in lender-led disposals, financing banks, M&A and restructuring advisors, insolvency and transaction attorneys, as well as buyers in carve-outs, secondary transactions, and minority divestitures without a viable guarantor.
Synthetic W&I requires a standalone structure. The warranty schedule should be reconciled early on with the scope of due diligence, the virtual data room (VDR), the Q&A, the signing/closing mechanics, and loss calculation. Only then can a policy-based warranty schedule be developed that is actually insurable despite the absence of seller liability.
This article is intended for general informational purposes only and does not constitute specific legal, tax, or insurance advice. Whether and to what extent insurance coverage is available depends on the specific facts of the case, a legal review, the insurers’ underwriting requirements, and the final terms of the policy.
How does Risk Partners provide support?
We are available on short notice to provide an initial assessment of the insurability, marketability, or structuring of a synthetic W&I solution.
Call us at +49 89 6223383-0 or email us at dealinsurance@riskpartners.de.
