Representations and Warranties Insurance: Trends and Benefits

Business Litigation Update

Date: March 31, 2020

On March 25, 2020, Aon released its Representations and Warranties Insurance Claim Study, an analysis of representations and warranties insurance (RWI) claims filed over the past several years. RWI has become an increasingly popular transactional insurance tool used in mergers and acquisitions to insulate against post-closing risks. As Aon’s study demonstrates, RWI offers buyers and sellers in M&A transactions more than just theoretical protections – as more and more of them use it, insurers are standing behind the product and paying out on these policies. Aon studied about 340 claims made on more than 2,450 RWI policies placed by Aon in North America between 2013 and 2019. The results are informative and provide assurance for market participants who continue to rely on this emerging product.

  • Claims are being made more frequently. Claims were made on 22% of all policies placed between 2013 and 2017, but from 2014 to 2016, claims gradually increased from 18.6% in 2014 to 25.3% in 2016. Aon anticipates this trend will continue.
  • Insurers are paying on evidence-backed claims. RWI insurers paid more than $350 million above policy retention to policyholders, with more than $525 million in total loss being recognized by the insurers when factoring in erosion of the retention. Of these payouts, 24% were for $15 million or more, 35% were for $5 million or more, and 81% were for $1 million or more (with 46% of claims paid out for amounts between $1 million and $5 million).
  • Payouts trended upward. In 2019, the average claim payment was $10.7 million and 26% of claim payouts exceeded $10 million. This is up from an average payout of $5.4 million in 2017, although this may be due to an increase in claim size.
  • Insurers are increasingly engaging legal counsel and forensic accounting experts to assist with claims. Since 2013, insurers have on average engaged legal counsel 21% of the time and forensic accountants 7% of the time. However, recent years have seen a significant uptick in the use of forensic accountants, who were engaged on average 9% of the time in 2018 and 2019, up from 1% in 2013. For paid claims, the use of outside experts has increased since 2013, with insurers engaging legal counsel 56% of the time and forensic accountants or other experts 28% of the time. And from 2017 to 2019, insurers involved legal counsel and forensic accountants in paid claims at even higher rates, with legal counsel engaged 64% of the time and forensic accountants used 40% of the time.
  • The subject matter of these claims varied widely. Financial statement breaches, compliance issues, tax issues, employment and labor matters, undisclosed liabilities, material contracts issues, litigation and intellectual property matters all made up significant percentages of the 340 claims studied.
  • Claims are noticed quickly. Approximately two-thirds of claims are noticed within the first year post-close, and of those discovered later than one year post-close, nearly 60% arise out of third-party litigation or tax audits.
  • Claims are resolved quickly. Resolutions were achieved relatively promptly, with about 25% of claims resolved within six months and about 64% within one year.
  • Few claims were outright denied. In total, 30% of claims made during this time period were resolved, with 12% paid by the insurer and 18% settled within the retention. Only 4% of the claims studied were denied coverage.
Thompson Hine’s Perspective

As market leaders in representing insureds in the RWI claims process, we have seen similar trends. Although RWI is most frequently used in private equity or financial sponsor deals (about 75% of these deals), its use in North American deals of all sizes is increasing year-over-year, resulting in more and more RWI insurers in the market offering an expanding number of coverage options. We find many of our corporate and strategic buyers now regularly using RWI to guard against downside risks in acquiring new businesses, which is consistent with industry figures that show 34% of North American deals in 2018 utilized RWI.

Consistent with Aon’s data, our claims experience indicates the RWI product is working as intended. The underwriters insuring our clients are paying out on valid claims supported by evidence, allowing our clients to recoup losses more efficiently and economically than in a traditional post-closing M&A dispute.

As insurers increase their use of legal counsel to help resolve RWI claims, hiring experienced outside counsel can provide insureds with a significant return on investment. We frequently assist our clients in all facets of the RWI process, including conducting investigations, providing seller notifications, filing claims, negotiating with RWI insurers and advising on parallel indemnification actions, and we have obtained several favorable outcomes for clients seeking remuneration under RWI policies.


For more information, please contact:

Tony J. Rospert

Melanie M. Lazor

Kyle Hutnick

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