Transactional Risk Insurance (W&I): How to Close a Deal Without the Risk of Litigation
Are you selling or buying a company, real estate, or taking part in a larger transaction? Transactional risk insurance (W&I) protects you against losses arising from breaches of warranties, hidden liabilities, or legal defects that were unknown at the time the deal was closed. It minimizes the risk of future litigation and ensures a smooth transaction process. In this article, we explain how W&I insurance works and why it matters in M&A processes.
Article contents
What is transactional risk insurance (W&I)?
W&I insurance is a special policy that specifically covers risks associated with the purchase or sale of a business (or part of it), an ownership interest in a company, real estate, or other complex assets. In principle, it is insurance against the situation where, after closing, it becomes apparent that one of the “warranties” given by the seller in the transaction documentation was not true at the time of transfer.
In this context, a warranty means the seller’s statement about the condition and legal status of the sold entity or asset.
For example, that the company has no hidden liabilities, all licences and permits are in order, the seller is not aware of any impending disputes, the accounting has been kept properly and in compliance with applicable legislation, employees are duly registered for social security and health insurance, etc.
If it is later proven that these statements were untrue and caused the buyer loss, the buyer is entitled to claim damages from the seller. In practice, however, the seller often withdraws after the transaction, their assets are dispersed, or they become unreachable.
This is where W&I insurance comes in. It ensures that the loss caused by a breach of warranty that was not known to the buyer at the time of closing is covered by the insurer, not by the seller out of their own pocket.
Why is W&I insurance critical for M&A transactions?
Every purchase or sale of a business or assets involves risks. The seller is never a 100% objective source of information—whether out of fear that the deal might fall through, or simply because they forget something or do not know. The buyer, in turn, is often reluctant to fully rely on what is on paper, even after due diligence has been carried out.
Consider a typical situation: you are buying a smaller company. The seller assures you that the company has no tax issues. You consider them a decent person, the deal closes, the seller takes the money and leaves.
Six months later, you receive a notice of the initiation of a tax audit for the last three years. It turns out that part of the revenue was not properly taxed. You owe significant amounts to the tax authority, plus interest and penalties.
Without W&I insurance, you pay all costs yourself and try to recover the loss from the seller through court proceedings—which costs you time, money, and stress. Litigation can take years.
With W&I insurance, you submit a claim to the insurer and, after it is reviewed and approved, you receive compensation within weeks or months.
The same applies to environmental burdens affecting real estate that only come to light after the purchase, legal disputes with former employees, old unpaid receivables from suppliers, or, for example, a legal defect in the Czech Real Estate Cadastre that the seller “forgot” to mention.
How does W&I insurance protect the buyer and the seller?
Buyer’s perspective
The buyer typically negotiates so-called indemnification from the seller—i.e., the seller’s commitment to compensate the buyer in the event of a breach of warranty. However, as shown in the example above, the seller may later prove to be unreachable, without sufficient assets, or simply unwilling to pay.
W&I insurance ensures that if a breach of warranty is discovered during the policy period (typically 18–36 months, and longer for certain risks, e.g., 5–7 years for tax risks), the buyer can submit a claim directly to the insurer.
The insurer then pays the loss in accordance with the insurance contract and its terms and conditions—regardless of where the seller is located or what their financial position is.
Typically, the insurance covers: tax risks, legal disputes and claims, breaches of environmental protection laws, employment disputes under Czech legislation, contractual risks, unauthorised use of intellectual property, etc.
Seller’s perspective
From the seller’s perspective, there is also an interest in W&I insurance. Although it may seem paradoxical, the insurance protects the seller as well.
If W&I insurance did not exist, the buyer would negotiate extensive warranties with high financial penalties—or would reduce the overall price or build a complex mechanism into the contract to retain part of the purchase price in a special account (a so-called holdback, escrow).
Insurance, on the contrary, leads to a “cleaner” deal: less money is held back during the warranty period, warranties are appropriately scoped, and the seller can truly end cooperation with the buyer after signing, without having to fear future claims.
There are also policies specifically aimed at protecting the seller (so-called Seller-Side W&I), for example in case the buyer falsely alleges that a breach of warranty occurred, or in situations where the seller wants the cleanest possible exit from the transaction.
What risks does W&I insurance cover?
W&I insurance is not a universal safety net. It covers specific risks that fall under “breach of warranty” or “non-compliance with agreed information” that were not known and could not reasonably have been identified before the transaction was closed.
Conversely, it will never cover losses caused by changes in market conditions, a poor business decision by the buyer after the acquisition, or matters that were knowingly known to all parties at the time of the deal or should have been known as part of standard due diligence.
What the policy typically covers
- Tax risks: Loss arising from retrospective tax assessments, underpayment of VAT, social security contributions that the seller did not administer correctly or that are identified during a state audit.
- Legal disputes: Damages, fines, or other legal claims by third parties arising as a result of the seller’s breach of law in the period prior to the acquisition.
- Environmental burdens: Loss arising from land contamination or breaches of environmental protection laws that the seller failed to disclose contrary to the warranties.
- Employment disputes: Disputes with employees relating to the period prior to the acquisition, unlawful dismissal, breaches of the Labour Code, unpaid wages, etc.
- Contractual breaches: Breaches of existing commercial contracts, for example where the seller warranted that all key supplier or customer contracts would remain in force, but in fact they were personal to the seller and terminate upon a change of ownership.
- Intellectual property: Unauthorised use of trademarks, patents, copyrights, or software used by the seller that infringed third-party rights.
- Accounting and records: Hidden losses, incorrectly kept accounts, unrecognised receivables, etc., that led to an inaccurate picture of the financial situation.
In line with modern practice, insurers also create so-called special risks endorsements—i.e., tailor-made addenda for specific industries or situations that extend standard coverage to include additional specific risks.
Related questions on W&I insurance risks
1. Can the policy cover a loss that I knowingly overlooked during the pre-acquisition review?
No. W&I insurance covers only those risks that were not known to the buyer and that a reasonable buyer could not have discovered even through proper due diligence. If you had access to information and knowingly failed to verify it or ignored obvious red flags, the insurer may reject the claim by referring to the so-called known risk exclusion. That is why it is crucial to engage a lawyer before the acquisition to carry out a thorough legal audit (due diligence).
2. How long does it take for the insurer to pay out an insurance claim?
The processing time varies depending on the complexity of the case and the completeness of the documentation provided. Typically, it is a process taking several weeks to a few months from filing the claim with complete documentation. However, some risks take longer to resolve, especially where there is a complex dispute or a complicated situation requiring additional investigation. The attorneys at ARROWS, a Prague-based law firm, can help you prepare high-quality documentation so that the claim is handled as quickly as possible.
3. Does the policy also apply to a transaction that I concluded informally or without legal assistance?
The situation is more complicated here. A W&I policy usually requires that the transaction be concluded formally through a written legal agreement that clearly defines the seller’s warranties. If you concluded the deal “on a handshake” or with insufficient legal documentation, the insurer may have difficulty proving what was agreed, and the claim may be difficult to enforce. Without proper legal documentation, in the event of a claim you would often first have to prove the existence and scope of the warranties through court proceedings—and that is exactly the kind of dispute you are trying to avoid with W&I insurance.
Typical mistakes and risks in deals without W&I protection
1. Underestimating the risks of hidden liabilities
The seller may have “systematically forgotten” obligations towards the state, creditors, or employees. These obligations may not become apparent immediately, but only, for example, after a tax audit or after a third party asserts a claim. In such a case, you are already bound by the contract and bear full responsibility.
2. Litigation takes longer and costs more than you expected
Even if you have a strong legal position, pursuing compensation from the seller through the courts is time-consuming and costly. Court proceedings can take 2–3 years or longer.
Costs for lawyers, court fees, and lost time can easily reach hundreds of thousands to millions of Czech crowns. Insurance will save you these complications.
3. The seller “gets rich” and disappears
The fact that the seller had money at the time of signing the contract does not mean they will have it when you want to serve them with court papers.
If they have already spent the transaction proceeds, transferred assets to other persons, or left the Czech Republic, even the best legal position will not help you actually recover compensation.
4. Getting insurance later costs immeasurably more
If a problem arises after the deal is closed and only then you take out insurance, the new policy will not cover that already existing problem.
For technical reasons, W&I insurance generally applies only to risks that materialise after the policy is taken out and that were not known at the time it was taken out. So you are back where you started—without protection.
5. Insufficiently drafted warranties
If the warranties in the share purchase agreement are not drafted clearly and specifically, the policy will either be too narrow (it will not cover what you need), or, conversely, enforcement will be complex and uncertain.
The attorneys at ARROWS, a Prague-based law firm, specialise in the drafting and structuring of W&I insurance and know how issues most commonly arise in practice.
How W&I insurance works in practice
The procedure for arranging W&I insurance is essentially standardised, but it requires care and cooperation from all parties:
- Risk identification – You and your team (including your lawyer) clarify which risks pose the greatest threat in the transaction. Does it relate to taxes? Environmental matters? Employees? Contracts?
- Selection of the insurer – In the Czech Republic, W&I insurance is primarily offered by large international insurers or their branches. They offer a range of products. It is not only about price, but also reputation, flexibility of terms, and service in the event of a claim.
- Preparation of the questionnaire and documentation – The insurer will provide you with an extensive questionnaire (often 10–20 pages) asking in detail about all potential risks and transaction parameters. Along with the questionnaire, key transaction documents and due diligence reports are submitted.
Without honest and complete answers, a so-called “blind spot” may arise—i.e., a risk that will not be covered by the policy. - Detailed risk assessment by the insurer (underwriting) – The insurer will carry out its own risk assessment (underwriting), analysing the submitted documents, due diligence results, and the questionnaire. It will often request additional information or conduct its own investigation.
If at this stage it becomes apparent that you intentionally provided false information or concealed material information, the insurer may refuse the policy or subsequently declare it invalid due to fraudulent conduct. - Negotiation and placement – Based on the risk assessment, the exact coverage terms, exclusions, the amount of the deductible (so-called franchise), and the maximum indemnity limit will be determined. This of course also includes setting the premium.
- Integration into the agreement – The policy is usually arranged in parallel with the share purchase agreement itself and applies specifically to the warranties listed in the agreement.
- Insurance claim – If, after closing, you discover a breach of warranty, contact the insurer with the documentation. The insurer will verify whether it is an insured event under the agreed terms and, if approved, will pay the insurance proceeds.
Risk table: What you face without W&I insurance
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Potential issues |
How ARROWS attorneys help |
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Hidden tax liabilities and audits – The Financial Administration discovers that the seller incorrectly accounted for VAT, failed to pay social security contributions, or concealed income for the period prior to the acquisition. You must pay the arrears, interest, and penalties. |
We will oversee the preparation of W&I insurance so that it reliably covers tax risks; we will help you file a claim with the insurer and represent you in communications with it if it hesitates to pay out. |
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Third-party legal disputes – A former employee sues for severance relating to the period before the acquisition, or a creditor seeks payment of a debt you were unaware of. You become the target of a lawsuit. |
We will arrange a legal due diligence review before the purchase to identify potential disputes; if they arise later, we represent you vis-à-vis the insurer and, if necessary, also in court proceedings. |
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Environmental burdens – The land or building has hidden contamination that the previous owner neglected. You must invest in costly remediation you did not anticipate. |
We will organize a legal and factual analysis of environmental risks; we will ensure the policy covers environmental defects and burdens; if a claim arises, we represent you vis-à-vis the insurer. |
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Invalid or terminated contracts – Key contracts with customers or suppliers are tied to the seller personally and terminate after the change of ownership. You lose key business relationships. |
As part of due diligence, we review all key contracts and their transferability; we will ensure the policy covers the risk of losing contracts; where necessary, we assist with contract renegotiations. |
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Unauthorized use of intellectual property – After the purchase, you discover that the software, trademark, or design in use infringes third-party rights. You face damages and legal disputes. |
We will ensure a comprehensive review of intellectual property (including international IP); we draft the seller’s warranties clearly; we will cover the risk of IP infringement in the policy. |
Final summary
W&I insurance is not a luxury for large corporations – it is a standard tool for anyone buying or selling a business, an ownership interest, real estate, or participating in a complex commercial transaction.
It is an investment that protects you from a catastrophe suddenly emerging a year or two after the deal – hidden taxes, a legal dispute, an environmental issue, or unexpected problems in important contracts.
Without insurance, if a loss occurs you are entirely dependent on your own legal position against the seller, which means lengthy, costly, and uncertain court disputes. With insurance, you can resolve the matter within a relatively short timeframe and efficiently with the insurer.
The key to success lies in high-quality preparation: clear identification of risks, diligent completion of the insurance questionnaire, and selecting a suitable insurer with the right terms and conditions.
All of this requires the expert perspective of an attorney who knows the local conditions in the Czech Republic, works with international insurers, and has experience with which risks actually materialize in practice.
Our attorneys in Prague at ARROWS advokátní kancelář have many years of experience with W&I insurance and will assist you from risk identification, through negotiating the policy, to filing an insurance claim if needed. If you do not want to risk the deal falling through right when it matters most, contact us at office@arws.cz.
FAQ: Most common questions on choosing an insurer and the terms
1. How much does the policy typically cost?
The price of W&I insurance usually ranges from 0.5% to 2% of the transaction value. The specific percentage depends on the nature of the deal, the scope of identified risks, the selected scope of coverage, and the insurer. For larger transactions (in the tens of millions of Czech crowns and above), the percentage tends to be lower.
2. What is the usual policy period?
The most common policy period for breaches of business warranties is 18–36 months from closing. For certain risks, such as tax risks, insurance is arranged for a longer period – typically 5–7 years, because a tax audit may occur even several years later. The policy period is a key parameter that must be carefully agreed in advance.
3. What is the difference between the deductible and the policy limit?
The deductible is the portion of the loss (expressed as a fixed amount or a percentage) that you pay yourself and up to which the insurer does not pay. For example, the first CZK 100,000 of the loss. The limit is the maximum amount the insurer will pay under one or all insurance claims. Both figures are negotiated depending on the risk and the price of the policy. A higher deductible usually means a lower policy price, but also greater risk for you.
4. What happens if I intentionally withheld something in the questionnaire and it is discovered later?
If the insurer learns that you intentionally provided false or incomplete information (so-called fraudulent conduct, fraud), it may declare the policy invalid and deny the claim. The consequences may also include criminal liability.
ARROWS attorneys ensure, when preparing the questionnaire, that all answers are truthful and complete – this is critical for the validity and enforceability of the policy.
Notice: The information contained in this article is of a general informational nature only and is intended for basic orientation in the matter under the legal framework as of 2026. Although we strive for maximum accuracy, legal regulations and their interpretation evolve over time.
We are ARROWS advokátní kancelář, an entity registered with the Czech Bar Association (our supervisory authority), and for maximum client protection we maintain professional liability insurance with a limit of CZK 400,000,000.
To verify the current wording of regulations and their application to your specific situation, it is necessary to contact ARROWS advokátní kancelář directly (office@arws.cz). We accept no liability for any damages arising from the independent use of the information in this article without prior individual legal consultation.
Read also:
- Why Legal Support Is Essential in M&A Transactions: Key Risks and Phases
- Vendor Due Diligence: Protecting Value and Price in Company Sales
- Pre-Closing Dividends and Working Capital Adjustments in M&A Deals
- Selling a Company: From Letter of Intent to Closing Key Pitfalls
- Expansion via Share Deals in the Czech Republic: Legal Checklist for Safe Growth