RESOLVING POST-ACQUISITION DISPUTES: REPRESENTATIONS AND WARRANTIES (R&W) CLAIMS
CD: There is a lot of focus on the interplay between representations and warranties insurance (RWI) and M&A. On the claims side, how does claims processing for RWI differ from that of other types of insurance?
Wothers: One of the fundamental differences is that there are multiple business relationships to manage. Two significant things have occurred before the claim is ever made under an RWI policy. First, an M&A deal has been negotiated and second the RWI policy has been underwritten, taking into account key facets of this deal. Many business relationships are involved in both aspects that need to be managed in the claims process. Another difference that makes the claims different from other policies is that RWI policies are written specifically for a particular deal. Each transaction is unique, therefore each claim is unique. The specific risks transferred and not transferred are normally extensively negotiated in the underwriting process. Therefore, in order to understand the context of such issues it is particularly important to talk to the underwriters.
Evans: Another way that the RWI claims process is different is that the coverage assessment is not what it sometimes initially may seem. For example, there may be minor issues that may result in a breach of an acquisition agreement’s representations; however, RWI policies frequently contain materiality scrapes. This means that the misrepresentation may not need to be material in order for there to be a breach. In fact, part of the evolution over the last several years broadening risks to insurers has included the use of materiality scrapes.
Hayes: Another distinction is that a literal reading of some representations may result in breaches from the moment they are made. These may include the ‘no undisclosed liability’ representation and the ‘true and accurate financial statement’ representation. Neither is truly capable of being underwritten if read literally. Even audited financial statements under generally accepted accounting principles (GAAP) do not reflect that financial statements are true and accurate. Therefore, we must rely on relationships to read these provisions in a commercially reasonable way and work to achieve a commercially reasonable resolution.
Jul-Sep 2021 issue
Niles, Barton & Wilmer LLP