Warranty and indemnity (W&I) has become a more common feature in hospitality real estate transactions in recent years and W&I will become a more standard feature in the hospitality industry, given its attractiveness on high profile hotel and resort transactions.

But what is behind the interest in W&I insurance on hospitality transactions, and what is the benefit to buyers and sellers?

In recent years, there has been an increase in the take-up of W&I Insurance in hospitality real estate transactions, including a number of notable high profile hotel and resort transactions in Asia.

The concept of insurance is familiar to many the world over. We take out insurance for our home, property and our health, to name a few. It provides security, peace of mind and assigns the risk to a third party, the insurer. W&I operates within a similar framework.

Similarly, the same concept of risk mitigation can be applied during real estate transactions for the benefit of both the buyer and the seller. Inevitably, during any hotel transaction process, the seller will want to mitigate the risk of any unknown future liability post-completion, whilst the buyer will want the seller to stand behind their reps and warranties in relation to the business and/or the real estate, and cover costs in the event of a breach. W&I insurance provides a means of resolving the different requirements of the parties to enable the acquisition to proceed.

Furthermore, W&I replaces the traditional mechanism of using escrow holdbacks and/or company guarantees by providing cover for losses arising from a breach of a warranty or indemnity in connection with the transaction. The aim of the insurance policy is to mirror the risk in the Sale and Purchase Agreement (SPA), and make the policy as “back to back” with the SPA as possible.

Benefits of W&I during a hotel transaction

W&I facilitates deal success, by not only mitigating buyers’/sellers’ risks during M&A hotel transactions, but also progressing the SPA negotiation process by expediting the timeline in which the buyer and seller reach agreement on reps and warranties as well as the cap and collars of the reps and warranties, which tends to be one of the more heavily negotiated parts of the SPA.

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