Warranty and Indemnity Insurance - The practice behind the promise (How to make an effective claim)

Current W&I Insurance Market: Burgeoning market and growing claims experience

Private equity investors are well aware of the deal-enabling benefits of warranty & indemnity insurance ("W&I"). The W&I market continues to expand, with new participants keeping premiums low and terms improving. This is resulting in more claims, with nearly 20% of policies now resulting in one [1]. If you haven't had to claim yet, it is probably only a matter of time before you have to.  With a recently reported full insurance limit claim payment of €50 million to FSN Capital concerning its acquisition of Gram Equipment, the product does respond.

Is it easy to collect on a claim under a W&I policy?

You might believe that it's just a matter of presenting the claim and collecting the money. It's not that easy!  It is not that difficult either, provided you follow some basic guidelines. We provide some tips below on how to make a successful claim and reduce the risk of litigation, but first highlight the procedure.

The anatomy of a successful W&I claim – What are the steps in the process?

  • Establishing a breach of an insured warranty

-     Has the warranty been insured, or has it been omitted or modified?

-     Do the facts fall within the scope of the warranty? Collect evidence to prove the breach and present it by reference to the warranty. Make sure you analyse the position at the time the warranty was given.

-     Awareness: you may have to prove that the Sellers were aware of the facts founding the breach, or is there a "knowledge scrape" in your policy which obviates this? 

  • Check that you are within the policy period for claims made.
  • Do any exclusions apply?
  • Have you suffered a loss?

-    Just like any claim under an SPA, you have to prove loss, with all the difficulties that entails (your loss is generally the value of the target as warranted compared to the true value).

  • Notifying the insurer

Tips for a successful W&I claim

  • Negotiate a favourable policy.

-     Take care in reviewing and negotiating the policy, make sure your lawyer understands the policy; it will pay dividends when you come to make a claim.

  • Notify as soon as possible.

-     It is important to notify the claim as soon as reasonably practicable. Failure to do so can compromise your claim.  

  • Be specific – set out the relevant facts/evidence, the warranty that is breached along with a calculation of loss flowing from it; provide expert evidence where appropriate.
  • Provide a reasonable, rather than an ambitious, assessment of loss.
  • Demonstrate that policy exclusions do not apply.
  • Show how you have sought to mitigate your loss.
  • Co-operate with the insurer (especially where the policy requires it).

Key takeaways – in summary

Present a timely, focussed claim, demonstrating why the claim is covered. Present a reasonable claim that you can justify and engage with the insurer in an open and collaborative manner. Provide the supporting materials the insurer asks for.  This is the way to maximise your chances of a successful claim. A lack of preparation or precision, or overly ambitious claims or loss calculations, can lead to valid claims, or the valid element of claims, being resisted.

If you wish to read more, an article expanding on some of the points raised in this blog is available here. If you want to discuss any aspect of the above, in relation to your use of W&I insurance, or making a claim, please do not hesitate to contact us.

[1]  AIG 2018 Claims Intelligence Report "M&A Insurance – The new normal?".

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