Specific indemnity

Definition

When DD surfaces a specific problem too material to disclose away but too uncertain to price in, the standard pattern emerges: buyer demands a specific indemnity. The issue exits the R&W system (where it would fall under the general cap with basket filter) and becomes a separate legal object with its own mechanics.

Four standard application areas in Benelux mid-market deals in 2026. First, pending or threatened tax procedures: an open VAT inspection, a corporate tax assessment under appeal, a pending transfer-pricing dispute. Second, environmental liability: known or suspected soil contamination, asbestos presence, or pending environmental permit issues. Third, specific legal claims: an employee claim not yet resolved, a product-liability case in progress, a commercial dispute with a supplier. Fourth, regulatory compliance issues: a discovered GDPR breach, a permit deficiency, a sector-specific compliance gap.

The legal structure has five parameters negotiated case by case. (1) Coverage: 100% of damage above any threshold: no basket filter as for general R&W. (2) Cap: often the estimated maximum exposure (e.g. €500k specifically for a tax claim) or "no cap" for very specific related-party claims. (3) Survival: tied to the specific risk: tax-specific indemnities run to tax statute of limitations (5-7 years), environmental to 10+ years. (4) Defence rights: who controls legal defence of the claim: seller typically wants full control, buyer wants at least cooperation. (5) Separate escrow: typically 50-100% of the estimated maximum exposure escrowed for the duration, on top of the general R&W escrow.

For sellers a specific indemnity is both protection and risk. Protection because the issue exits the R&W discussion and thus doesn't pollute the general R&W system. Risk because it covers 100% of damage (no basket filter) and typically has no time limit within the general survival period. We see sellers who understand this structure typically negotiate for: (a) a high threshold below which the specific indemnity doesn't activate (to filter trivial claims), (b) defence rights to steer the legal defence themselves, (c) a cap proportional to actual risk exposure.

Worked example

A Ghent manufacturer was sold for €14m EV. During DD the buyer discovered a pending tax dispute of €120k with the Belgian tax authority over 2022 VAT deduction, status "under appeal". A general R&W with €1.4m cap would cover this but would also block the cap for other undiscovered issues. Solution: specific tax indemnity with cap €250k (€120k + 100% buffer), own escrow €120k, survival to 2031 (tax statute of limitations), seller controls defence. General R&W cap stayed unchanged for other claims. 18 months post-closing: the tax authority issued a final assessment of €78k. Seller paid through the escrow; remaining €42k released after tax certainty. General R&W cap stayed intact for later claims (two arose, totalling €180k under the €1.4m cap). Without the specific indemnity the tax claim would have eaten the cap headroom.

When it matters

From the moment DD surfaces a specific, quantifiable issue too material to disclose away. Four questions to get the structure right: (1) what is the estimated maximum exposure (cap), (2) what is the likely survival period based on risk type (tax 5-7 years, environmental 10+ years, legal 2-4 years), (3) who controls legal defence, (4) how much escrow is proportional to estimated exposure (typically 50-100%).

Frequently asked

What's the difference between specific indemnity and general R&W?

General R&W covers unknown issues that surface later, with cap, basket, de-minimis and survival as filters. Specific indemnity covers one pre-identified issue, typically without basket or de-minimis, with its own cap and survival. Pure principle: known = specific; unknown = R&W. Avoid the same issue falling into both systems.

How much escrow is typically required for a specific indemnity?

50-100% of estimated maximum exposure. For a tax claim with €120k estimated exposure: €60-120k escrow, released as the claim is finally resolved. For highly uncertain claims (environmental, product liability) buyers often demand 100%; for well-quantified issues 50% typically suffices.

Who pays for legal defence of the claimed matter?

Negotiation point. Sellers typically want to control (and pay for) the defence themselves to preserve cost efficiency and defensive strategy; buyers want at least cooperation and approval rights on material legal decisions. A common middle position: seller pays and steers, buyer receives regular updates and holds veto over settlements above €X.