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In principle, it is possible for the policyholder and the insurer to agree on a supplement. In practice, buyers should use this if the scope of W&I insurance coverage can be significantly optimized.
In insurance law, an addendum or endorsement is understood as a contractual arrangement between the policyholder and the insurer, which is entered into to complement an existing insurance policy. Supplements are included in the concept of insurance policy within the meaning of § 5 VVG, just like the original policy (BGH, NJW-RR 2004, 892, 893). Many company insurance policies, such as liability insurance or D&O insurance, are concluded as annual contracts.
The appendix can have many causes
An addendum can be made as part of the usual negotiations to extend the contract, the so-called renewal, as well as during the year. It is generally used to update the content of the insurance coverage, to supplement it in the event that, for example, a new company is to be insured, or simply to correct errors in existing documentation.
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As part of contractual freedom, risks can also be contracted as part of an insurance policy with an agreed fixed term. This applies in particular to the specific design of one-time and non-recurring risks, such as project structures under construction or plant construction. A special feature is that the insurance policy can generally not be canceled by either the policyholder or the insurer. In the interest of the policyholder, this should also apply if one or more claims have occurred in the meantime that need to be settled. The fundamental mutual right to so-called damage settlement according to § 92 VVG is regularly waived.
W&I insurance initial situation
Transaction insurance, like W&I insurance, is regulated in a comparable way. The risk of non-compliance with guarantees and tax exemption is insured by means of a single premium under the previously agreed terms. According to the currently prevailing view, the buyer’s insurance is the buyer’s own damage insurance, more precisely sui generis financial loss insurance (Lüttringhaus in Lüttringhaus/Korch, transaction insurance, § 4 Rn6). The prescription period of insurance policies is usually staggered, ranging between two and three years for operational guarantees and between seven and ten years for fundamental and fiscal guarantees.
W&I insurance is contracted regularly for the signing of the transaction. In order to give the parties to the purchase contract the necessary legal certainty regarding the existence of the W&I insurance coverage to subscribe, the broker usually keeps in trust a policy already issued by the insurer previously, which after the purchase has been signed. the contract and the parties have confirmed that there have been no further significant changes to this in the meantime, which can be communicated to the policyholder.
In what situations is an addendum considered?
The transaction is signed and the terms of the policy are already agreed. In this initial situation, it could be assumed that the addenda do not have a remarkable relevance for transaction insurance, which has been very intensely negotiated. Legally, however, the agreement of a supplement between the policyholder and the insurer is also possible with this type of insurance. In practice, the policyholder can use this option in particular if the scope of the W&I insurance coverage can still be optimised.
Insurers generally expect parties involved in a transaction to make industry-standard efforts to disclose information and documents and subject them to robust due diligence. Therefore, the underwriting guidelines of no less insurers require at least legal, tax and financial due diligence on the part of the buyer to be able to insure a transaction. The principle is applied that the scope of the due diligence corresponds to and reflects the scope of the guarantees agreed in the purchase contract. Depending on the design of the catalog of guarantees, areas that must be specifically reviewed, such as environment, technology, intellectual property or insurance, may also be relevant. If an insurer considers that due diligence is insufficient on certain points, for example because a relevant jurisdiction for the warranty catalog, a type of tax or an entire area such as intellectual property has not been verified, an exclusion of coverage is usually issued. for the warranty or area in question reacted.
In view of the tight timelines of many transactions and bidding processes, as well as the catalog of guarantees that changes in the course of negotiations, the potential buyer and the consultants involved often do not have time to extend due diligence to all areas. warranty. relevant to the W&I policy and open points in time to be clarified before the planned signature. This situation is particularly disadvantageous for the buyer; after all, you have a seller who would be willing to give this guarantee. Other guarantees, for example in the case of a carve-out, can only be verified after the signing or even the closing has taken place. If a buyer in such constellations comes up with the idea of negotiating and taking out full W&I insurance only after signing, there is a risk that claims occurring and recognized in the meantime can no longer be insured by the policy.
Practical tip: Contact the insurance broker at an early stage
If one of the scenarios described above appears, it makes sense to contact the insurance broker involved at an early stage and talk to the insurer about the possibility of adding a guarantee or a certain range of guarantees later and later. In addition, it is advisable to expressly state the basic possibility of the corresponding supplements and the associated expectations of the insurer with respect to subsequent due diligence, naming the specific guarantees in the W&I policy (for example, in the guarantee calculation sheet). .
Insurers are interested in being able to offer a good and complete product that does not leave the insured with gaps in coverage of relevant guarantees and incomplete protection in case of breach of guarantee. Together, the scope of the subsequent due diligence and the possible conditions in order to extend the coverage can be determined through an addendum. In the best case, the policyholder can be sure before taking out the W&I insurance that the subsequent due diligence and disclosure of the report to the insurer can lead to inclusion.