Special Indemnity

Special indemnities address known risks

General representations usually address the accuracy of broad statements. A special indemnity focuses on a problem that the parties already know exists or may exist.

That makes the negotiation more direct: instead of arguing later over whether a broad representation was breached, the agreement states who bears losses from the specified matter.

Known issues can fall outside RWI

RWI is designed primarily for unknown breaches of covered representations. A diligence issue already known to the buyer or insurer may be excluded from the policy.

A special indemnity, price reduction, escrow or other bespoke mechanism can fill that gap.

The special indemnity can have its own economics

The clause may use a separate cap, no basket, a dedicated escrow or a longer survival period. It can also specify whether insurance recoveries, tax benefits or third-party payments reduce the reimbursable loss.

Those details determine whether the special protection is economically meaningful.

A dedicated escrow can isolate the risk

Recent SEC-filed agreements show separate general indemnity and special indemnity escrow concepts. Segregating funds can make the recovery source easier to identify and prevent the known issue from consuming a general escrow intended for ordinary claims.

The escrow release conditions can be tied to resolution of the identified matter rather than a standard anniversary date.

Drafting scope matters

A narrowly drafted indemnity can cover one dispute and its direct consequences. A broadly drafted clause can capture related proceedings, penalties, defense costs and follow-on liabilities.

The parties need to decide what counts as arising from the identified issue rather than relying on the word *special*.

Special indemnities can also solve valuation uncertainty

A known issue does not always justify reducing the purchase price by the full worst-case loss. The parties may agree that the probability or final amount is uncertain and use a special indemnity to allocate the realized outcome instead.

For example, a pending tax audit could have a possible exposure ranging from zero to $4 million. Rather than price the company as though the full $4 million will be lost, the seller can retain responsibility for the actual covered assessment under a dedicated indemnity.

That structure preserves more of the negotiated price if the risk never materializes while protecting the buyer if it does.

Common mistakes

Assuming a special indemnity is automatically uncapped Its cap and survival are negotiated.

Treating it as the same thing as RWI Known risks are often handled outside ordinary RWI coverage.

Ignoring the special escrow The separate recovery source can be the most important economic protection.

Example

Diligence identifies an unresolved pre-closing regulatory matter that the RWI insurer excludes. The buyer and seller agree that the seller will indemnify the buyer for losses arising from that matter and fund a separate special indemnity escrow that remains in place for a negotiated period.

A special indemnity converts a known uncertainty into a negotiated allocation of loss. Because the issue is already known, the drafting should identify the covered matter precisely enough to avoid turning the clause into an unintended general guarantee.