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It has been many years since warranty & indemnity (W&I) insurance could be described as a new product. It is now used in transactions across most sectors and geographies. We set out below some key perspectives on claims and maximising cover under a buy-side policy.
Applicable law and quantum of damages
The insuring clause usually provides that the buyer can recover under the policy the damages it would have been able to recover under the SPA or management warranty deed (MWD) if the key restrictions (defined usually as "limitation provisions") had been disapplied. Therefore, how damages are usually assessed under the applicable laws of the SPA or MWD is key.
In England, the default position will usually be a calculation comparing the warranty true/warranty false basis, assuming a hypothetical willing buyer and seller operating at arm's length (i.e. the diminution in value or DIV). This often requires expert evidence, and in undertaking the calculation, a breach can impact a number of variables in a valuation. For example, if the appropriate method of valuation is an estimate of EBITDA to which a multiple is applied, breaches of warranties can affect both of those inputs – compounding the effect on quantum.
A similar approach can be seen in Australia and the US, but in some European countries, such as Spain, the default is the indemnity basis of damages. Ultimately, which methodology results in a more substantial claim depends on the facts and how those impact the objective valuation (DIV) or lead to a clearly indemnifiable loss (indemnity basis). It is, of course, possible to prescribe the indemnity basis where the default is DIV, and some clauses give the insured the option.
Disclosure always matters
Insurers will not generally be looking to cover known matters. They may achieve this through exclusions for matters known to the insured, and/or what is disclosed (as defined) both under the SPA/MWD and policy. What is disclosed may well include information in the data room and diligence reports. The policy wording may supersede, improve or worsen the test under the SPA and close attention should be paid to this.
Where available, a disclosure "scrape" can be money well spent. This is when the insurers agree that the data room and/or due diligence reports will be deemed not disclosed for the purposes of the W&I Policy and results in a position more aligned to that under US Reps and Warranties policies. This can be useful in preventing insurers from asserting that passing or oblique references to facts in the data room or diligence reports are "disclosed". However, it is important to make sure that the effect is not undermined by representations in the No Claims Declaration as to what the deal team have read or considered.
Where available, a disclosure "scrape" can be money well spent.
Knowledge of the sellers requires careful consideration
In a claim under an SPA or MWD, the representing party will likely be the counterparty to the claim or dispute. However, the insurers under a W&I policy will have had only limited involvement in the transaction, and the sellers or warrantors will likely play no part in the claim or dispute. This can make it harder to establish a breach of seller awareness-qualified warranties. Again, a seller awareness knowledge "scrape" can sometimes be purchased for an additional premium, to neutralise that problem.
The judgments so far
Some of the issues that we see reported in cases include:
- Whether there was a breach, materiality thresholds and whether the buyer had "actual knowledge" as defined given the contemporaneous documents: Finsbury Foods Plc v Axis Corporate Capital Ltd & Ors [2023] EWHC 1559 (Comm).
- Whether positive cover in the warranty spreadsheet for anti-bribery and corruption (ABC) warranties could overcome an ABC exclusion in the policy through arguments as to mistake/rectification (it could not): Project Angel Bidco Ltd v Axis Managing Agency Ltd [2023] EWHC 2649 (Comm) and [2024] EWCA Civ 446.
- Whether, if a SPA precluded a claim if there had been an on-sale, that prohibition prevented a policy claim (it did): Aftermarket Network Australia Pty Ltd v Certain underwriters at Lloyd’s subscribing to Policy No 6482/13(c)-13087 [2016] FCA 1402.
- Discussion and affirmation of approach to valuation in Australia: UDP Holdings Pty Ltd v Ironshore Corporate Capital (No 2) [2019] VSC 645 and DTZ Worldwide Limited v AIG Australia Limited [2025] NSWSC 12.
While many cases are successfully resolved through negotiation, these cases demonstrate that it is important to:
- Procure the best policy you can – they are always bespoke and it is best not to have to rely on rectification/correction.
- Consider "scrapes" and ensure that all necessary provisions are disapplied.
- Be mindful of restrictions for what is known/disclosed.
Ultimately, the insured may well need to speak to personnel, collect emails and engage experts and lawyers, as well as their brokers. This will involve time and cost, but it is important to recognise that this investment would also be needed if the claim was direct against the sellers or warrantors.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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