How to Negotiate a Data Safety Warranty in an M&A Transaction

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The idea that the loss of life tax, ransomware and death are the 3 certainties of life isn’t only applicable to business. With data security breaches predicted to affect a company every two seconds, and costing businesses $265 billion just by 2031, it’s no surprise that more distributors are to be offering their customers with a different kind of warranty: a cybersecurity warranty. These warranties mitigate the economical threats posed by cyberattacks and eliminate the risk by shifting liability to the vendor. They’re typically a supplement to cybersecurity insurance, and help in filling in the gaps where insurance cannot cover a decrease.

Warranties can be a great tool for transferring financial risk, but they aren’t an alternative to a complete risk management system. A cybersecurity warranty can be used in lieu for cyberinsurance. However they should both be used together to reduce the risk.

It is crucial to limit the liabilities that aren’t covered in the warrant when you are negotiating one in an M&A deal. For example, regulatory offences cases typically have lengthy limitations time frames that exclude indemnification from a warranty.

Manufacturers should also make sure that their warranty covers the intended use of their products. For instance machine learning tools that analyze the walking patterns of a person can be covered by a warranty to be used for a variety such as helping people choose the correct shoes or diagnosing chronic pain. However, if the tool is used to monitor and intercept messages, a warranty disclaimer can keep the makers from recognizing any responsibility.