Article

Addressing the challenges of warranty and indemnity insurance claims

Merger and acquisition (M&A) activity in Europe has been growing for the past several years, although the pace has slowed down during the third quarter of 2022.

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Merger and acquisition (M&A) activity in Europe has been growing for the past several years, although the pace has slowed down during the third quarter of 2022. During this period of increased M&A activity, more entities have been purchasing warranty and indemnity (W&I) insurance policies to transfer their risk and to facilitate deals.

As a result, the number of W&I claim notifications has increased significantly, a trend that is expected to continue over the next two to three years.

Despite increased experience, process remains generally challenging

The increased volume of claims notifications has resulted in a better understanding of the W&I product, by insurers as well as organizations and their legal advisors. As a result, claims processes are generally faster and smoother than they were 5 to 10 years ago. Marsh’s Global Transactional Risk Claims Report shows that, globally, 61% of W&I claims Marsh monitored between 2017 and 2021 were resolved within 18 months, with 22% being resolved in less than six months. Earlier Marsh reports show that claims processes had been significantly slower in previous years.

Despite this positive trend, some W&I claims processes remain unnecessarily slow and painful for organizations, mainly due to the complexity of W&I claims. Cross-border deals, for example, require parties to understand various legal systems, tax regulations, and/or accounting principles. And these generally lengthy claims processes are often a frustration for corporate M&A and private equity deal teams, who are used to fast-paced deal making and working against short deadlines.

Lastly, the size of W&I claims can be substantial. Insured limits are generally between 10% and 30 % of the enterprise value. Considering that enterprise values can amount to several billion euros, policy limits are usually sizeable. When the stakes are this high, insurers tend to act more critically and thoroughly, which may prolong the process.

Diligent claim substantiation critical

The outcome of a claim, and the speed by which it is resolved, depends heavily on the information included in the claims notice, the first step in the claims process. The notice should contain all the necessary information that allows the insurer to assess the claim quickly and efficiently. All notifications should include a comprehensive description of the facts and circumstances leading to the discovery of the (potential) loss, an indication of the warranties that have allegedly been breached, documentation evidencing the alleged breaches, and, if possible, a quantification of the loss.

Most organizations have internal resources with the experience and knowledge to assess complex legal, financial, or tax issues. However, an external financial report, legal opinion, or tax memo may be helpful to support a claim, making the claims notice more objective and comprehensive. 

Just as critical as the content of the claims notice is the tone; it typically is best to avoid an aggressive approach when drafting the claims notice. Organizations should remember that they are working with a business partner to whom they transferred a financial risk, and the outcome may be improved when they take a collaborative approach from the start.

At what point should I involve my insurance broker?

Your insurance advisor or broker can guide you through the claims process, including identifying the information you should submit and insurers’ preferred channels and format for communication on the claim.

Understanding the potential warranty breach and documenting how and when it occurred is an important part of the claims process. Gather all the evidence that supports your claim to reduce the risk for a prolonged process or that the claim would be rejected.

Internal and external documentation from third parties — including correspondence with government entities, such as the local tax authority, or other external experts’ reports — should be carefully reviewed to determine which information to present to your insurer. This can help streamline the process, and could expedite claims resolution. 

Once the claim has been submitted, your broker will be available to support you in further communication with the insurer, operating as a bridge to a positive conclusion.

In summary, the claims process can be smoothened by good claims preparation, a collaborative attitude, and the early involvement of the broker. But pre-placement due diligence is also critical as it may help you understand insurers’ track record and how they typically respond to claims. It is important to note that the most appropriate W&I coverage may not be the least expensive one available. It is critical to work with your insurance advisor or broker to understand the differences among insurers regarding the way they typically handle claims since there can be significant differences.

Why Marsh?

Marsh, the world’s leading insurance broker and risk advisor, has unique insight into streamlining the claims process and how to best submit a notification to achieve a desirable outcome. Our team of specialists has strong relationships with and understanding of the industry — we have monitored more than 1,100 W&I claims which were notified between 2017 and 2021 — providing us with the knowledge and experience to help clients purchase the coverage that meets their needs and support them in case of a claim.

Originally published in Private Equity Magazine, France, Jan. 5, 2023.
 https://www.pemagazine.fr/

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Marnix Terpstra

Head of Transactional Risk Claims, Continental Europe

Marnix Terpstra heads Marsh’s transactional risk claims team for Continental Europe. Before joining Marsh in January 2022, he worked at an insurance company, specializing in warranty and indemnity claims, and as a loss adjuster.

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Priscille Hérault

Director, Private Equity and Mergers and Acquisitions, France

With over 15 years’ experience in the M&A insurance field, Priscille joined Marsh in 2021 after a decade with Tokio Marine HCC, where she was Underwriting Manager for M&A insurance for Europe and the UK as part of the Financial Lines group. Prior to working with Tokio Marine, Priscille had structured, negotiated and facilitated complex risk transfer solutions on cross-border M&A transactions while working for major international brokers in France.

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