Warranty and indemnity insurance (W&I cover) provides buyers and sellers with a way to reduce their transaction risks, and also facilitates a clean exit from investments for both sides. This is particularly important in an uncertain economic environment, even if global M&A activities are rather subdued at the moment.
The current edition of the AIG M&A Claims Intelligence Series shows that W&I insurance offers potential for both major claims and basic losses, and that it covers a multitude of transaction problems.
For example, the study shows that the amount of damage continues to rise, whereby the largest claims payments (over USD 10 million) account for 19% of claims, compared to 15% in last year’s study and 8% in the year before. The average amount of damage has also risen in this segment.
One of the major concerns that policyholders have when purchasing W&I insurance is how such claims will be managed. In the event of a warranty breach, the policyholder wants to know what he can expect from his insurer if he submits a notification of claim in the context of his W&I policy.
Therefore the insurer's experience with claims and the process for settling the claims should be the policyholder’s main decision criterion when purchasing W&I insurance. Of course, price and the scope of the insurance cover also play an important role, but since the entire objective of the policy is to offer cover and assistance in the case of a justified claim, the insurer's understanding of claims settlement can help the policyholder make informed decisions and ensure that each notification of claim is processed as smoothly and efficiently as possible.
To assist buyers of W&I insurance policies, I would like to illustrate the general process for a typical claims settlement below. As a policyholder, I would like to provide you with important information about submitting notifications of claim in the context of your policy.
To settle a claim, it is best when the policyholder, insurance broker and the insurance company work as a team. The submission of a claim and the review of cover should not be viewed as adversarial processes. It is well known that M&A transactions can be quite complicated and involve a lot of money, therefore the submission of notifications of claim in the case of W&I insurance can also be complex. But for the most part, it will involve the following five steps for policyholders:
As insurers, we are aware that our policyholders want claims to be settled as soon as possible. Therefore our claims settlement process is designed in such a way that our cover position can be confirmed as quickly as possible. Of course, a well-prepared notification of claim goes a long way towards ensuring that a cover decision can be made in due course. Against this background, I have prepared the following information that policyholders should observe when they wish to make a claim in the context of their M&A insurance policy.
It hardly needs saying that claims that are submitted in the context of the policy must have originated during the contract term of the policy. It is also important that a notification of claim is promptly submitted to the insurer during the term of the policy. The wording of a W&I policy regularly stipulates that the policyholder must submit a notification of claim as soon as possible after the damages become known, possibly within a certain number of days.
Please also verify whether there are certain requirements for how a notification of claim should be submitted to the insurer. In the present situation, and considering that many of us are working at home at the moment, it may be more difficult to send items by post (if sending by post is a requirement). If applicable, ask your insurer whether he will accept delivery by e-mail (which is probably also more convenient for him). Also speak with your insurer about the best delivery method for other documents.
Make sure that your notification of claim includes a detailed description of the pertinent facts and circumstances that are related to the damages, and that the guarantees and compensation that in your view were not provided follow from this information. At that time, you may not be aware of all of the relevant information, but when you provide the insurer with a detailed list of available information, it not only satisfies the typical requirements under the policy but also helps the adjuster with limiting his inquiries to the other required information, allowing him to concentrate on the important questions regarding the cover decision.
If you have relevant documents connected to a notification of claim (e.g. court documents, important contracts, tax assessments, expert appraisals or correspondence), please attach copies of these documents; the adjuster can probably submit a cover position much faster if he receives this information right away. The insurer may have more questions, or he may require additional information. However, if you attach everything that you believe the insurer will require to the notification of claim, it will almost certainly contribute to a smooth claims settlement process.
If you believe that it would help to discuss the notification of claim over the telephone at the beginning of the process, for example if there is a lot of background information, your insurer will often be grateful to have such a discussion together with your insurance broker and possibly a legal advisor. As noted above, all parties should work together in this process, as early communication for all important points or particular questions can help with the settlement of the claim.
A strong M&A claims management team consists of a global network of in-house claims experts who are supported by dedicated legal advisors. The adjusters should have experience in major claims and should specialise in M&A notifications of claim.
That sounds like it should be a matter of course. But it is not, even though it is of fundamental importance.
Feel free to ask your insurer.