The use of representations and warranties insurance remains a vital risk-transfer component of merger and acquisition transactions, but RWI claims have become more frequent and severe as the claims process has become more prolonged and difficult, according to a report released by Lowenstein Sandler.
The report, “Are Buyers Still Getting Paid? The Evolution of R&W Insurance Claims,” is based on the firm’s recent survey of RWI market participants, including private equity, investment banking, strategic buyers, insurance brokers, and insurers. It explores the impact on RWI claims from factors including the COVID-19 pandemic, event-driven litigation, and data and privacy concerns, over the last three years.
Co-author Lynda A. Bennett, chair of Lowenstein Sandler’s Insurance Recovery practice, notes both benefits and challenges of the rise in RWI claims. On the one hand, Bennett says, “R&W insurance has transformed the M&A market for the better,” resulting in smoother negotiations, increased financial protections, and more fulsome diligence. However, as the claims process becomes more prolonged and difficult — as the report found — she warns that: “The RWI claims market [could start] becoming a commoditized insurance product that does not fit the needs of M&A stakeholders, who expect the RWI policy to function as an effective and responsive risk-transfer solution.”
Following up on the firm’s previous RWI insurance study in 2020, the new report notably examines the impacts on RWI claims payment for transactions involving special purpose acquisition companies and the increased focus on environmental, social and governance issues.
Key survey findings include:
- Increased Buyer Reliance on RWI: 61% of respondents reported claims entirely within the retention.
- A More Challenging Claims Process: For claims exceeding the self-insured retention, 60% of respondents reported that a claim payment was negotiated, a sharp decline from the 87% success reported in 2020. A majority of respondents reported that it takes longer than six months for R&W insurers to provide an initial coverage position for the claim despite promises in the policy language for a much shorter response time; it continues to take up to three years to get to the stage of securing an actual recovery.
- ESG-Related Breaches: 49% of respondents reported breaches involving an ESG-focused or ESG-driven company, and 32% of respondents confirmed that submitted claims involved an R&W related to ESG compliance, policies and procedures.
- SPAC Transactions: 22% of respondents reported RWI claims that involved SPACs, a significant number considering SPACs are a small subset of the overall M&A transactions that RWI reaches.
- Emerging Breaches: Financial statement breaches (42%) remain the leading type of breach reported by respondents, but data security/privacy breaches (40%) and environmental breaches (24%) also increased.
- New “Center Stage” Coverage Defenses: When asked about reasons R&W insurers denied coverage, respondents reported that the insurers increasingly challenge the existence of a breach (40%) and the amount of loss (47%). Insurers also have readily invoked COVID/CARES Act exclusions (20%).
To counter the impact of the prolonged process, Lowenstein partner and report co-author Eric Jesse recommends “an immediate course correction,” advising R&W insurers that “If they fail to respond to buyers’ needs for speed, ROI, and rationality in the claims handling process, they run the risk of killing the goose that laid the golden egg.”
Conducted in late 2022, the survey includes the responses of 154 executives involved in the RWI market across its key stakeholders: private equity (23%), investment banking (23%), insurance brokerage (21%), insurance companies (14%), and operating companies, i.e., strategic buyers and sellers (12%), as well as other market participants (7%). In some cases, results total more than 100% because of rounding and/or because respondents were asked to select all options that applied or provided data for multiple claims.
Click here for the full report.
About Lowenstein Sandler LLP
Lowenstein Sandler LLP is a national law firm with over 350 lawyers based in New York, Palo Alto, New Jersey, Utah, and Washington, D.C. The firm represents leaders in virtually every sector of the global economy, with particular emphasis on investment funds, life sciences, and technology. Recognized for its entrepreneurial spirit and high standard of client service, the firm is committed to the interests of its clients, colleagues and communities.
Sr. Manager, Marketing Communications
Lowenstein Sandler LLP