What’s meant by transaction liability insurance?
Warranties & Indemnities, which cover potential breach of the seller’s warranties under the sales and purchase agreements. When there’s commercial real estate ready to be sold, you have a seller that would like to maximize his price while minimizing his guarantees for the state of the building. The buyer seeks to minimize the price while getting the maximum guarantees from the seller. W&I insurance is a way to help make the transaction happen and it can ease the communication leading to the final agreement between the seller and the buyer.
It’s gradually become a standard in Central Europe after coming to Europe from the US via the UK. When did it arrive in Prague?
The first time it was used here in Prague for a major transaction was about 10 years ago for a big shopping mall on namesti Republiky. The deal was insured by W&I insurance because one of the international real estate property funds was leaving the CE region and didn’t want to have liabilities for the next two years. It wanted to have a clean exit. That’s really the main goal of this insurance for private equity funds and real estate funds that use it: the clean exit.
How do you explain the difference between W&I and title insurance?
The difference between W&I insurance and title policy is that title policy covers any formal mistakes: for example, a third person claiming that he has better ownership right to the property. Whereas W&I insurance covers a breach of the seller’s warranties. It has to be clear that as the seller in a sales and purchase agreement I’m the rightful owner of the property and I have all legal capacity to transfer ownership.
How could an owner lack the capacity to sell?
It could be discovered that there are some formal problems or that he needed approval of his spouse, for example, of from his business partner. All of this is covered by insurance and it’s now used quite widely between Czech sellers and Czech buyers, even with smaller deals. Recently, for example, we acted for two people who were selling land for further commercial development. The aim was to build a logistics or production site. But the sellers weren’t willing to give a personal guarantee as demanded by the buyer. So, they decided to take out W&I insurance and title insurance, even though it was a relatively small deal.
How has this type of business changed over the years, if at all?
It’s become possible to cover other specific risks, for example the potential invalidation of a construction permit. This came about simply because of a request from the financing bank for construction of a commercial building. The bank was concerned, even though the developer had a valid construction permit, because some parties opposed its validity. They claimed they hadn’t been made a party to the permitting process. So, we helped clients find insurance against this specific risk. Because remember, there are only four title insurers that are able to cover this type of risk in Central Europe.
What other types of risks can be covered?
We had one case of an office building with one main tenant that provided most of the income, meaning the valuation was done on the basis of this rent agreement. As it turned out, that tenant had already told the owner in an email they wanted to leave the building and end the lease agreement. But the seller never communicated this important information to the buyer. After the deal was done, the buyer took over all the email communications and discovered that the main tenant was ready to leave. There was W&I policy in place for this transaction, which covers fraud or willful misconduct on the part of the seller, such as concealing important information. As it happened, the new owner managed to find another tenant, so the loss was minimal, so nothing was paid out.
Why do is it good to speak with an insurance broker, rather than using a specific insurance provider I’ve already worked with?
If you rely only on one provider, they may not feel comfortable with a particular type of risk. For example, perhaps you’re buying land from a municipality and the municipality forgets to publicize the offer on its official notice board. That’s a formal mistake that could be challenged in court. If your insurer doesn’t like covering this type of risk, or suspects there might be a problem, he might quote a very high price. If you rely on just one provider, he can do whatever he wants. But if you have three or four providers, they’ll have to compete with each other. That’s why there are international funds who are obliged to have tenders for this sort of insurance. They have to be able to document that they had two or three offers and that they negotiated the terms.