Do Reps and Warranties Insurers Pay Claims? Yes–With Caveats, New Survey Finds
National law firm Lowenstein Sandler’s survey confirms that reps and warranties (R&W) insurance is, and will remain, a critical element of deal flow. R&W insurers are paying claims that exceed the self-insured retention (SIR). However, the survey also suggests that the risk-reward model for R&W insurance may need to be recalibrated as the majority of claims remain within the SIR.
During the last decade, intense deal activity spurred the growth of R&W insurance–an alternative risk-transfer mechanism to indemnify buyers for breaches stemming from a seller’s misrepresentations in acquisition agreements.
While R&W policies have proliferated, a key question remains unanswered: Do insurers actually pay the claims?
The answer is “yes”–with some caveats. A common hurdle to clear is incurring a loss that exceeds the SIR. Our survey revealed that more than two-thirds of all respondents said that all the claims fall within the retention and therefore do not result in payment by insurers.
For claims that do exceed the retention, our survey confirmed that R&W policies provide value to buyers. Indeed, the data shows buyers are able to negotiate with insurers to secure at least partial payment for the vast majority of claims that exceed the SIR.
Finally, our survey data demonstrated that securing maximum value for claims takes time, diligence, and careful selection of the claims advocacy team.
Our 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 the sellers (insurance companies and insurance brokers). Therefore, it offers a well-rounded view of the trends and differences experienced by leading players in the market.
Our report also offers buyers practical guidance–based on the data–to consider when presenting a claim under an R&W policy. This guidance and our findings take on greater meaning amid the disruption COVID-19 has caused to the global economy. We will explain how the R&W insurance landscape will likely be altered by the pandemic. We will also discuss how, while the crisis will likely slow claims processing in the short term, competition among insurers is expected to heat up once deal flow returns for this lucrative book of business.
Emerging Themes in R&W Insurance
For years, the increasing popularity of R&W insurance was changing the mergers and acquisitions market. R&W insurance has become so popular that, to be considered competitive bidders, buyers often were required to include such insurance as a deal term. More players (both buyers and insurers) in the space also meant heavy competition, declining premiums, and lowering SIRs over time, as well as increased leverage for policyholders to negotiate policy terms.
Despite R&W’s prevalence, little is known about the insurers’ claim payment histories. This dilemma arises from confidential settlements of claims and because many R&W policies require arbitration. Multiple findings show that, for the claims that exceed the SIR, more than 50 percent of the loss is paid by the insurer, following a negotiation.
In addition to answering the key question of whether R&W insurers pay claims, our research revealed four themes:
- Do not delay the payday. The claims process takes time. Policyholders should not wait to get started. This means moving ahead with claims–even if negotiations with the seller about indemnity issues are ongoing or it is not yet clear that the loss will exceed the SIR.
- Knowledge is power. Buyers should not be afraid to negotiate with R&W insurers for better terms. This survey offers data that empowers buyers to challenge existing market conditions.
- Be well armed in the claims process. When buyers make claims under R&W insurance policies, they should rely on the expertise of a claim advocacy team consisting of coverage counsel, experts, and brokers. Not only will the claim advocates be a resource in articulating the breach and valuing the loss but our survey shows that the insurers will be well armed with counsel and experts of their own–making it necessary for buyers to ensure an even playing field.
- Don’t take “no” for an answer. Our survey reveals that R&W insurers routinely issue knee-jerk claim denials, but those denials are the beginning, not the end, of the conversation. Ultimately, by challenging an early disclaimer of coverage, most buyers are able to turn the denial into a claim payment.
