Lowenstein Sandler announced today the release of Getting Paid: A Look at Representations & Warranties Insurance, a groundbreaking report based on a survey that, among its many goals, sought to answer a key question about reps and warranties (R&W) insurance: Do insurers actually pay claims?
The answer is “yes”–with some important caveats. Eighty-seven percent of respondents said at least a partial payment was negotiated for all R&W claims that exceeded the self-insured retention. But more than two-thirds of respondents said that all claims fall within retention–and therefore do not result in payment by insurers.
“R&W insurance has become increasingly popular in recent years, but little was known about insurers’ claim payment histories,” Bennett says. “This survey tells us that policyholders should promptly make their claims, they shouldn’t fear negotiating with R&W insurers for better terms, they should rely on expert claims advocacy teams, and–maybe most importantly–they shouldn’t take ‘no’ for an answer."
The survey, conducted in 2020, gathered input from 149 executives involved in the R&W insurance market across its key stakeholders: the buyers (private equity funds, investment banks, and operating companies) and sellers (insurance companies and insurance brokers). It offers a well-rounded view of the trends and differences experienced by leading players in the market.
The survey uncovered important takeaways about the discovery, and submission, of claims, how claims break down by industry and nature, and other broad trends in the claims handling process.
Key findings include:
- A plurality (41 percent) of respondents said three to six months pass between the discovery of a breach and the reporting of a claim to an R&W insurer. Seventy-six percent of respondents said it takes between three and 12 months after that for an insurer to provide its coverage position, and 71 percent said it takes six to 18 months after the claim is submitted for payment to be received.
- The financial services industry has far and away the largest number of R&W insurance claims, according to respondents (72 percent). Next were technology (29 percent) and health care (28 percent).
- A majority of claims stem from deals with seller indemnification, as sellers have recognized that they have skin in the game where R&W insurers have subrogation rights against sellers in the event of fraud.
- Financial statements form the foundation for most claims reported (55 percent). This is likely because buyers often “dig in” to acquired companies’ financial statements and records soon after a purchase.
About Lowenstein Sandler LLP
Lowenstein Sandler 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.