Warranty and Indemnity (W&I) Insurance: Key Claims Characteristics
The rise in the number of warranty and indemnity (W&I) claims has been led by the increased uptake in W&I insurance placements in recent years.
While W&I is seen as an M&A* tool, it is still an insurance policy containing standard obligations, which an insured must adhere to in order to make a successful claim. Obligations will generally include obtaining insurers’ prior consent before incurring defence costs or settling third party claims. Under some W&I policies these obligations will be a condition precedent to liability, meaning that failure to adhere to them will release insurers from liability to meet a claim.
Below are three key areas an insured should acknowledge when making a claim under a W&I policy:
- Insurers will always need to investigate the claim. However, it is important to strike a balance between providing sufficient information to insurers to prove the claim (taking into account what information is available), and preventing insurers from unreasonably delaying the claim process through spurious information requests. Insureds must be prepared to share relevant information, allow sufficient time for policy analysis, and understand that insurers may want the input of external advisers.
- W&I policies tend to dis-apply subrogation rights (insurers suing in the name of the insured) against the warrantors/sellers – except where the breach of warranty was fraudulent. When investigating whether a breach was in fact fraudulent, a balanced approach should be considered as investigation may be difficult or commercially sensitive. Insurers are naturally nervous of losing the right to recover from a third party. Where there is an indication of fraud (or until the absence of fraud is demonstrated), insureds must also take care to preserve insurers’ subrogation rights.
- W&I claims can lead to complex questions as to the valuation of the loss. If the breach is a litigation warranty, the quantification may be straightforward – such as the amount paid out to the third party claimant – but where the breach may have impacted on the value of the company, quantifying the loss is more challenging. Where a multiplier is used, questions can arise about the valuation of a private company and the actual impact on that valuation – for example, what is the actual difference between the price paid and the true value of the company? Expert accountants will often be required by the insured and insurers in order to reach a consensus on loss.
It is important for insureds to consider these nuances at the time of placement and at the outset of the claim – both to maximise recovery and to understand the likely processes and timescales involved in resolving a W&I claim.
* Mergers & Acquisitions (M&A)