Warranty and indemnity insurance: how UK founders cap their risk after selling up
Warranties and indemnities do not disappear once a deal completes, but insurance and careful drafting can limit how much a seller actually has to pay out.
Why this matters after signing, not just before
Most explainers on warranties and indemnities focus on what these clauses do at the point of drafting a sale and purchase agreement. But for a founder who has just sold their company, the more pressing question comes after completion: how exposed am I, for how long, and is there any way to cap it? This is where disclosure letters, liability limits and warranty and indemnity (W&I) insurance come in, and it is an area many first-time sellers underestimate.
The disclosure letter is your first line of defence
When a seller gives warranties, they are stating facts about the business as true. If something in the warranties turns out to be wrong, the buyer can claim. The disclosure letter is the seller’s chance to qualify those warranties by telling the buyer about specific issues, exceptions or facts that might otherwise make a warranty false.
A well-prepared disclosure letter, cross-referenced against the data room, is one of the most effective ways founders protect themselves. If something is properly disclosed and the buyer proceeds anyway, the seller generally cannot be sued later for that same issue, because the buyer went in with eyes open. Sellers who rush this stage, or rely on generic disclosures, leave themselves needlessly exposed. Specialist M&A solicitors will usually build the disclosure letter methodically, matching each warranty to the relevant documents and known facts about the business.
Caps, baskets and time limits
Even with good disclosure, sellers negotiate financial and time limits on their liability, because open-ended exposure is unattractive to anyone selling a business, especially founders who may need the proceeds to fund a new venture or simply move on with their lives. Common mechanisms include:
- An overall cap, often linked to some proportion of the purchase price, above which the seller cannot be liable no matter how many claims arise.
- A basket or threshold, meaning claims below a certain value cannot be brought at all, and sometimes claims only count once a cumulative total is reached.
- Time limits, so that general warranty claims must be brought within a set period after completion, while tax-related warranties and indemnities often run longer because tax authorities can look back further.
- Carve-outs, where certain warranties (often around title to shares, capacity to sell, or fraud) are excluded from the caps and time limits entirely, because buyers will not accept limits on the most fundamental protections.
None of these figures are standard across deals. They are negotiated based on deal size, sector risk, and how much leverage each side has, so there is no fixed percentage or period a founder should expect. What matters is understanding that these numbers exist and are negotiable, and getting proper legal advice on what is reasonable for a deal of that size and type.
Where warranty and indemnity insurance fits in
W&I insurance has become a common feature of UK private M&A, particularly in private equity-backed exits and increasingly in venture-backed founder exits too. The policy sits behind the warranties in the sale agreement and pays out if a warranty claim succeeds, rather than the seller having to pay from their own pocket.
There are two broad structures. A seller-side policy protects the seller against having to pay a successful claim. A buyer-side policy, now more common, lets the buyer claim directly against the insurer rather than chasing the seller, which is attractive to founders who want a clean break with no lingering liability hanging over them after completion. Buyer-side policies are often marketed as giving sellers a genuinely clean exit, since the buyer’s only real recourse sits with the insurer rather than the individuals who sold the business.
W&I insurance is not free and is not automatic. It involves underwriting, a dedicated due diligence exercise, exclusions for known issues, and a policy excess that usually still leaves some retained risk with the seller. It tends to make more commercial sense on larger deals where the cost of the premium is proportionate to the risk being transferred. For smaller founder exits, straightforward negotiated caps and disclosure may remain the more practical route, though the insurance market has been moving down toward smaller deal sizes over time.
What founders should actually do
Founders going through an exit should treat the disclosure letter as seriously as the warranties themselves, start it early rather than at the last minute, and get advice on whether W&I insurance is proportionate for the deal size and sector. It is also worth understanding, before signing anything, exactly which warranties sit outside any caps, since these are the ones that carry the most personal risk. None of this replaces proper legal advice from a solicitor experienced in UK company sales, but knowing the shape of the protections available means founders go into negotiations with realistic expectations rather than surprises after the money has landed.
Where to check current practice
Rules and market norms around M&A insurance and disclosure evolve, so founders should get advice from a corporate solicitor and check current guidance rather than relying on generic figures.