While global mergers and acquisitions activity has been somewhat subdued, representations and warranties insurance (R&W1) provides both buyers and sellers with a solution that helps reduce transaction risks and assists in facilitating clean exits from investments on both the buy and sell-side – vital in the uncertain economic environment.
A rising tide of large claims, the fifth edition of AIG’s latest M&A Claims Intelligence Series, shows R&W insurance has the potential for both severe and frequent claims and responds to a wide range of deal issues.
For example, the study shows that Claims severity continues to increase with the largest claims (valued over $10 million) at 19% of material claims, up from 15% in last year’s study and 8% the year before. The average claims size in this band also increased.
One of the key concerns for insureds when purchasing warranty and indemnity (W&I) insurance will of course be – “how will this work if something goes wrong?” In the event that a warranty breach is discovered, an insured will want to know what to expect from its insurer when making a claim under its W&I policy.
An insurer’s claims experience and handling process should be a key consideration for an insured when purchasing W&I insurance. Price and scope of coverage are of course important, but as the entire aim of the policy is to provide cover and response in the event of a valid claim, understanding the claims process of an insurer can help an insured make an informed decision, and ensure that any claim runs as smoothly and efficiently as possible.
In order to assist purchasers of W&I insurance, I would like to give you an illustration of the general structure of a typical claims process in the following. As the policyholder, I would like to give you some important advice on how to submit a claim report under your policy.
The claims process work best when insured, broker and insurer work together collaboratively – making a claim and considering coverage should not be viewed as an adversarial process. At risk of stating the obvious, M&A transactions can be complicated and of high value, and correspondingly W&I claims can be complex. An insured will however likely find that their claim broadly follows the below five steps:
1. Receipt and Acknowledgment of a Valid Claim Notic
2. Review of the Claim and Request for Further Information
3. Third Party Claims
4. Legal Counsel and Accountancy Experts
5. Coverage Decision and Payment of a Covered Claim
As an insurer, we recognise that our insureds want claims to be resolved expeditiously, and our claims process is designed to confirm our coverage position as quickly as possible. Certainly however, a big help in ensuring that a coverage decision can be made without delay is a well-prepared claim notice. With that in mind, we have set out here our top tips for insureds to consider when bringing a claim under an M&A insurance policy.
It likely goes without saying that, in order for the policy to respond, a claim must be made within the relevant policy period. It is also important to bear in mind however that, even within the policy period, a claim notice should be provided to insurers promptly. A W&I policy wording will likely stipulate that a claim notice should be provided as soon as possible after an insured become aware of the claim, and possibly also within a set number of days.
Remember to check for any provisions detailing how a claim notice should be delivered to insurers. Of course, under the current circumstances and where many of us are working from home, service by post (if this is required) will likely be more difficult. Consider asking your insurer if they will accept service by email instead, this will likely be more convenient for them too. Work together with your insurer to also decide on the best method for delivery of any supporting documents.
3. Provide Details
Make sure that your claims notice provides a detailed description of the relevant facts and circumstances relating to the claim, and highlights the warranties or indemnities that you consider may have been breached. It may be the case that you do not yet have knowledge of all the relevant information at this stage, but providing an insurer with a detailed account of the available information will not only meet the typical requirements of the policy, but will assist the claims adjuster in limiting their requests for further information required, and allowing them to focus on the key issues to determine coverage.
4. Relevant Documents
If there are relevant documents relating to a claim (for example court documents, key contracts, tax notices, expert evidence or correspondence), please enclose copies of these documents; a claims handler will likely be able to provide a coverage position much more quickly if they receive this information straightaway. An insurer may still have questions to ask or require further information, but providing anything that you anticipate the insurer will require within your claim notice will likely assist a smooth claims process.
5. Initial Claims Discussion
If you consider that it would assist to have an initial call to discuss a claim, for example where there is a detailed background, your insurer will often be happy to have such a call, together with your broker and any legal advisers. As above, the claims process should be collaborative, and early communication on any key points or particular issues will assist in resolving a claim.
A good M&A claims handling team consists of a global network of in-house claims experts supported by dedicated legal advisors. The adjusters should be experienced in large claims and specialize in M&A claims reporting.
This may sound obvious. But it is not, although it is crucial.
Feel free to ask your insurer.
Your Alexander Nagler