Every answer and its explanation appears here once you have finished the path. Each one then links to the matching glossary entry, where the concept is set out in full with its worked example.
1. A buyer already holds an escrow of 5 percent of the price for eighteen months. What does a warranty and indemnity policy add?
A solvent counterparty with no role in the business, therefore a usable claim beyond the escrow's expiry
The policy does not replace the warranty, it replaces the counterparty: the representations given in the agreement stay exactly the same, only who pays changes if one turns out false. The escrow already provided money, but capped and for eighteen months. What the buyer gains is twofold: a counterparty that stays solvent after the selling fund has distributed proceeds to its investors, and a counterparty with no role in the business. That second point decides whole files where the management team sold and stayed in charge, since enforcing the warranties against them then means suing the people the value just paid for depends on.
Glossary entry →2. A fund acquires a company carrying both a pending, quantified dispute and the ordinary unknown risks of a target. How does the transactional risk family handle those two exposures?
Two separate policies, warranty and indemnity for the unknown and contingency for the identified dispute
Transactional risk insurance is not one product but a family, and the dividing line is clean: warranty and indemnity covers what is not known, contingency insurance covers an identified and quantified legal hazard, tax liability insurance covers a specific tax position. A known risk never slides into the warranty policy, by construction rather than by severity: that policy insures the inaccuracy of a representation, and a representation cannot be inaccurate about a fact both parties know. The shared logic of all three is the same, turning an uncertainty that would sink the negotiation into a bounded transfer.
Glossary entry →3. Before a sale, a tax credit whose treatment is defensible but contestable worries the buyer. Which policy takes that risk, and why not the warranty policy?
Tax liability insurance, because the risk is identified and quantified, where the warranty policy covers the unknown
Tax liability insurance addresses a known uncertainty: a defensible but unguaranteed treatment, an exemption whose application is arguable, a restructuring with an uncertain tax outcome. The insurer assesses the probability of success of a precise legal position rather than a frequency, drawing on tax opinions and an analysis of litigation risk. What it sells is therefore the conversion of a binary, file-specific risk into a certain and bounded cost, which unblocks a transaction that this single point could have stopped. Contingency insurance instead addresses a pending or imminent dispute rather than the treatment of a tax position.
Glossary entry →4. A contingency insurer agrees to cover the adverse outcome of a pending dispute. What is it really assessing?
The probability of success of a litigation position, assessed on legal opinions and file analysis, with no law of large numbers
Contingency insurance isolates a precise, identified and quantifiable legal hazard and transfers its cost. It benefits from no pooling: there is no portfolio of comparable disputes across which to spread the hazard, and two pieces of litigation resemble each other only from a distance. Underwriting is therefore legal before it is actuarial, resting on counsel's opinions and on reading the file. A strong exposure to adverse selection follows, since the party best acquainted with the weakness of its position is precisely the one seeking to insure it, which is why profitability in this niche line depends on file selection far more than on the rate applied.
Glossary entry →5. A company is sold. Its former directors want to stay covered for decisions taken before completion. When is that cover placed, and why then?
At the transaction, because a claims-made policy only responds to claims notified during its period
Under a claims-made policy, only a claim notified during the period is covered, while the wrongful acts may give rise to a claim only years later. Run-off cover closes that gap by maintaining protection for future claims relating to prior acts, and it is frequently negotiated over several years at an acquisition, six years being a common order of magnitude for former directors. The practical point is timing: once the transaction closes, the target's program changes hands and the window shuts. This is a step taken at completion, and it cannot be caught up at the next renewal.
Glossary entry →6. A directors' and officers' policy covers the financial consequences of claims brought against individuals. Which claims, and from whom?
Claims from shareholders, creditors, employees, regulators or third parties, alleging mismanagement, misleading information or breach of a duty
The policy targets the individuals holding management or board positions, and claims can come from shareholders, creditors, employees, regulators or third parties. They generally allege mismanagement, misleading financial information, breach of fiduciary duties or violation of a law. It also carries defense costs, which are often the first charge actually incurred. The market is cyclically driven by the litigation climate, social inflation and the inflow or withdrawal of reinsurance capacity, and its scope is widening: the NIS2 directive made directors personally liable for failures in cybersecurity obligations, creating a new convergence with cyber policies.
Glossary entry →7. A company is in liquidation and its creditors are pursuing its former directors. It can no longer indemnify anyone. Which part of the policy is still useful?
Side A, which indemnifies directors directly when the company cannot cover them
The three sides differ by which insured they protect, and insolvency is the situation where the distinction stops being theoretical. Side B reimburses the company when it has indemnified a director: it therefore assumes the company has the means and the right to do so, which is no longer the case. Side C protects the company itself for its own liability, most often for securities litigation, and does nothing for the directors. Side A is the only one that pays the director directly when the company cannot or must not indemnify, which makes it the most valuable protection for a personally exposed board member. It is also why dedicated policies exist for that side alone.
Glossary entry →8. For lack of time, a due diligence exercise did not review the target's employment contracts. What effect does that have on the warranty and indemnity policy?
An exclusion on the unexamined subject, since underwriting does not cover what the review did not look at
Underwriting reads the buyer's due diligence, its legal, tax and financial reports, and questions the teams that carried them out. The principle is constant and always surprising: what the review did not look at is not covered. A diligence exercise that skipped a subject therefore produces not a more expensive policy but an exclusion on that subject. Insurance does not substitute for examination, it prices it. The answer about covering the unknown confuses two distinct things: the policy covers what nobody knew, not what the buyer chose not to look at, and that is the difference between an unknown risk and an unsearched one.
Glossary entry →9. Why does profitability in the transactional line depend on selection discipline far more than on the rate applied?
Because there is no law of large numbers: with no comparable portfolio, a drift in selection only shows up after several years
Every transaction is unique, and the insured risk is specific to the file: there is no portfolio of comparable sales across which to spread a hazard. The underwriter is therefore not estimating a frequency but the strength of a legal position, which brings the craft closer to writing an opinion. The consequence is practical and severe: an insurer that loosens its selection does not see it in the current year, because it has no statistical benchmark to notice, and the drift appears only as claims are reported, several years later. That lag is what makes selection, rather than the rate, the variable that decides profitability.
Glossary entry →