Transactional liability insurance – facilitating international corporate transactions and getting your claims paid

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William Gorman Passannante
Anderson Kill, New York

Carrie Maylor DiCanio
Anderson Kill, New York

John Leonard
Anderson Kill, New York

Global corporate mergers and acquisitions (M&A) activity continued to increase towards the end of 2017, of which approximately one-third were cross-border deals.[1]Private equity firms and companies use transaction liability insurance to manage the risk inherent in M&A. Most common among these types of insurance is representation and warranty (R&W) insurance, which covers the risk of a target company’s seller breaching representations and warranties in a purchase agreement. R&W insurance was first created decades ago but has become increasingly popular in the past few years, particularly among private equity firms, which use it to facilitate the purchase and sale of portfolio companies.

This article discusses the history of transactional liability insurance, reviews existing case law addressing coverage issues that can arise under transactional liability policies and offers strategies for policyholders with claims under these types of policies.

History and types of transactional liability insurance

As with any insurance, transactional liability insurance transfers a potential risk from the policyholder to an insurance company for a substantial premium.[2]

Numerous products fall under this umbrella, including R&W insurance and loss mitigation underwriting insurance.[3]

Representation and Warranty Insurance

R&W insurance developed relatively recently in the historical arc of insurance coverage. It did not reach widespread availability in the United States until the 1990s.[4] Similar insurance policies, known as warranty and indemnity insurance, were sold in the United Kingdom roughly a decade earlier.[5]

Purchase agreement representations and warranties ensure the accuracy of the target company’s statement concerning, among other things, accounting compliance and the value of inventory and accounts receivable. Misrepresentations concerning these assets could have a substantial impact on the value of the acquired company and result in significant damages to the buyer. R&W insurance is intended to reimburse the buyer for the damages resulting from seller’s potential misrepresentations.

Typically, R&W insurance indemnifies losses incurred on account of a breach of a seller’s representations and warranties during an M&A transaction.[6] Either the buyer or the seller can purchase the insurance and do so for differing reasons. Buyer-side insurance allows the buyer to recoup losses suffered in a transaction from the insurance company which sold that policy, rather than pursuing the seller for recovery.[7] Limiting seller’s liability to indemnify the buyer for a potential breach can entice the seller to accept a lower purchase price because it caps the amount of escrow required for the transaction and facilitates distribution of proceeds. On the other hand, seller-side insurance indemnifies the seller for financial losses suffered by the buyer.[8] These separate policies can work in tandem to cover almost any loss incurred through a seller’s breach of representations or warranties in a transaction.

R&W policies may provide first-party coverage as well as liability coverage against third-party claims related to the transaction. R&W policies also extend the time period for discovery of breaches of representations and warranties by providing for a policy period of up to seven years in which to discover and notice a claim.[9] Generally, an R&W policy will have a retention and may contemplate seller’s liability for a portion of the loss in the amount of the indemnification cap under the purchase agreement.[10]

Loss mitigation underwriting

Another type of transaction liability insurance is loss mitigation underwriting (LMU) insurance, which provides ‘insurance coverage for existing litigation or for litigation that is imminent.’[11] LMU insurance was born after a fire at the MGM Grand Hotel, Las Vegas in the early 1980s exhausted the hotel’s policy limits with future litigation still pending.[12] Insurance companies designed and sold new policies to the hotel to insure against these future losses that were sure to arise from the fire-related litigation.[13]

Because LMU insurance is meant to provide coverage for litigation stemming from a loss that already has taken place, generally an LMU policy is written for the specific situation that it is meant to insure.[14] Thus, a typical LMU policy features few exclusions to coverage.[15] At the time an insurance company sells the LMU policy, the risk is already known and the extent of the risk is yet to be determined. With the shared knowledge regarding litigation expenses, a policyholder and an insurance company can design a policy to insure the amount of risk for which coverage is necessary.

Transactional liability cases

Arbitration provisions in many transaction liability policies largely prevent reported cases concerning R&W coverage disputes. One issue central to R&W insurance disputes is valuation of damages.

Valuation of damages - Ageas (UK) Ltd v Kwik-Fit (GB) Ltd

Language in the securities purchase agreement has impact on both the transaction and on insurance, as certain terms in the securities purchase agreement may be incorporated by reference into the insurance policy. The case Ageas (UK) Ltd v Kwik-Fit (GB) Ltd, [2014] EWHC(QB) 2178 (Eng) shows how language in the purchase agreement affected the damages recoverable under an R&W policy. The insurance company effectively stepped into the shoes of the seller for purposes of calculating recovery under the policy in that case.

Ageas (UK) Ltd v Kwik-Fit (GB) Ltd, [2014] EWHC(QB) 2178 (Eng) involved the valuation of loss under a warranty and indemnity policy (a name for an R&W policy in the UK). Ageas, a personal lines insurance company, purchased a warranty and indemnity policy from Chartis Insurance UK Ltd (now AIG), in connection with its acquisition of a company called Kwik-Fit (GB) Ltd (KFGB) and its subsidiaries, including Kwik–Fit Insurance Services Ltd (KFIS), which sold car insurance.

The policy insured Ageas for losses in excess of £5m resulting from KFGB’s breach of warranties in the securities purchase agreement governing the transaction.[16]


‘the audited annual accounts of KFIS and its subsidiaries for the calendar years 2007 to 2009 were prepared in accordance with GAAP, gave a true and fair view of the assets, liabilities and financial position of the relevant companies, and that the management accounts for the first five months of 2010 had been prepared on a consistent basis with the annual accounts and did not materially misstate assets or liability or items of income and expenditure or profits or losses for that period.’[17]

Ageas alleged that KFGB breached this warranty through its accounting treatment of bad debt, which resulted in the company’s revenue and assets being overstated for 2009 by £1,404,639, and for the five months ending May 2010 by £905,157.[18] The monthly calculation of ‘time on cover bad debt’ (TOCBD), the time for which a customer with an instalment contract was insured but had not paid the premium, was at the centre of this dispute. According to the opinion, TOCBD was at a ‘historical peak’ at the time of the transaction in July 2010.[19]

After Ageas settled with KFGB, Ageas and AIG litigated the valuation of damages under the policy. Ageas argued that its damages were £17.635m based on the value of TOCBD as of the date of the acquisition, resulting in AIG being liable for £12.635m under the policy. AIG, on the other hand, asserted that Ageas’ damages were only £8.792m, resulting in AIG being liable for only £3.792m.[20]

The parties did not dispute that ‘[t]he measure of loss for breach of warranty in a share sale agreement is the difference between the value of the shares as warranted and the true value of the shares’ and that the purchase price of £214.75m accurately valued the shares.[21] The parties differed, however, as to ‘whether in valuing KFIS at the date of acquisition, account [was] to be taken of the TOCBD experience of the business since the date of the acquisition.’[22]

In other words, Ageas argued that the value of TOCBD should be valued as of the date of acquisition, without considering the decrease in TOCBD post-acquisition. AIG, however, asserted that TOCBD should be calculated based on a rate of TOCBD per policy calculated ‘from the actual TOCBD post acquisition data’.[23]

AIG made two arguments in support of its position. First, AIG asserted that assessing Ageas’ damages as of the date of the breach would result in a windfall to Ageas. Second, AIG argued ‘that any benefit Ageas receives by the reduced post acquisition incidence of TOCBD is not one which the parties have conferred on Ageas by the allocation of risk in their contractual bargain.[24] The court disagreed with AIG on both points.

With respect to AIG’s argument that awarding damages as of the date of the breach would result in a windfall, the Court found that AIG’s analysis:

‘ignore[d] the effects of factors associated with reduction of TOCBD on other aspects of the business. For example, whilst a reduction in TOCBD is desirable as such, if it results form a reduction in number of instalment policies written, there will also be a reduction in the financing revenue of the business. The net effect of a reduction in TOCBD and reduction in finance revenue may mean an overall loss rather than a gain to the business, despite the fall in TOCBD. Valuing the company on the basis of a continuation of 2010 levels of bad debt does not involve a windfall if a subsequent reduction in bad debt is part of a trading pattern which as a whole results in a greater reduction than that forecast.’[25]

With respect to the second point on allocation of risk, the court found that the risk of the business doing better or worse was calculated into KFIS’s purchase price such that Ageas should reap the benefit of that risk since ‘[t]here was no provision, as there sometimes is in such agreements, for any post acquisition adjustment of the price based on subsequent trading performance.[26] The court stated that ‘what happened to TOCBD after the acquisition was therefore part and parcel of the way Ageas chose to run the business following acquisition and the interaction between those business decisions and the effect of the micro and macros economic conditions on the business. Those contingencies are all matters which the parties agreed are for Ageas’ risk.’[27]

The court further found that it was not relevant why TOCBD was lower in years following the acquisition – ‘It is sufficient that whatever the reasons, any resultant benefit was to be for Ageas to enjoy, just as Ageas would have to shoulder any resultant burden.’[28]

The court held in favour of Ageas.

Claims strategies

Most participants in cross-border corporate transactions would prefer never to have a claim arise from a deal and express similar views of insurance for such claims. If a claim does happen, a well-advised company actively manages both the pre-litigation portion of the claim process as well as, if necessary, a litigation or arbitration to resolve a disputed claim.

Dispute resolution considerations

R&W policies contain notice and cooperation provisions similar to those of other types of insurance policies. Facilitating the payment of an R&W claim usually involves providing the insurance company with information to support the claim and providing information in response to questions about the claim. Most R&W insurance policies contain a cooperation clause, which insurance companies often attempt to misuse in an attempt to manufacture a breach by the policyholder. Usually the policyholder’s best interests include responding fairly to proper information requests from the insurance company. Policyholders should keep a record of the information provided in order to respond to insurance company pre-textual arguments. As in most insurance claims processes, proper preparation and perseverance can overcome the usual impecunious approach of some insurance claims departments.

Although an R&W insurance policy may provide a window of several years for the policyholder to discover and provide notice of a representation and warranty breach, policyholders should take note of any potentially applicable time limitations in the policy – both with respect to notice and litigation or arbitration against the insurance company – and make sure to comply with policy provisions. Notice of a claim is often provided via the insurance broker but, in most venues, delay in giving notice should not impact coverage where the insurance company is not prejudiced by the delay. Nevertheless, it is advisable to work with your broker to ensure timely notice.

Be aware of choice of law and choice of venue provisions in the event that a coverage dispute results in litigation or arbitration. The policyholder may initiate litigation against the seller to recover the seller’s portion of indemnity for the breach while their insurance claim remains pending. Under a buyer-side policy, the insurance company should pay the policyholder’s claim regardless of whether any amounts have been recovered from the seller. Otherwise, to the extent that amounts due from sellers are uncollectable, coverage would be illusory. Indeed, this collection risk is a significant reason that buyers purchase R&W insurance.

Insurance recovery litigation or arbitration considerations

Many R&W policies include arbitration provisions that purport to require confidential arbitration under the rules of an alternative dispute resolution organisation, such as the American Arbitration Association or JAMS. Sometimes, those clauses are unenforceable and may be avoided in court. Policyholders should consider whether arbitration of insurance claims is acceptable to their organisation. Often, policyholders prefer to litigate claims before a jury, who are more likely to empathise with the policyholder, and avoid a confidential arbitration in which their fate may be determined by an arbitrator and after which there may be limited opportunities to appeal. Potential benefits to arbitrating a coverage dispute include the ability to select an arbitrator with subject matter expertise, potential lower overall costs, and the possibility of a faster resolution.

If a claim requires arbitration or litigation, discovery of the underwriting file may show the insurance company’s intent to insure the seller’s representations and warranties in the purchase agreement and potential damages arising out of a breach. Discovery of the claims file also may be central to resolution of any coverage issues. Although many R&W insurance claim handlers, brokers and underwriters often are attorneys, as a rule, the claim file is not privileged as between the policyholder and the insurance company even if the claim handler is a lawyer.[29]


Cross-border corporate transactions have continued at a torrid pace. Transaction liability insurance offers important protection paid for with hard-earned premium dollars to private equity firms and companies engaged in those cross-border deals. Companies seeking protection against an acquisition's post-sale performance, as well as its representations at the time of sale, should work with their broker to obtain the right insurance policies. If a claim arises, providing notice and properly documenting the claim process will aid in increasing insurance recovery. Private equity firms and companies rely on transactional liability insurance and should receive full value for their insurance premium payment.

* This is an updated and modified version of an article which was previously published in the Spring 2018 Coverage Journal by the American Bar Association.


[1]       JP Morgan, 2018 Global M&A Outlook – Navigating Consolidation and Disruption (available at

[2]       AON Risk Solutions, Risk intelligence: How to reliably mitigate transaction risk and secure clean exits (available at

[3]       William E Knepper & Dan A Bailey, Liability of Corporate Officers and Directors, s 28.09 (8th ed 2017).

[4]       4–32 Jeffrey E Thomas, New Appleman on Insurance Law Library Edition, s 32.02 (LexisNexis).

[5]       Thomas, s 32.02.

[6]       Jeff Anderson, Getting to 'Yes': Transactional Insurance Beyond Reps & Warranties 4–5 (April 2015).

[7]       Thomas, see note 4 above, at 32.01.

[8]       Thomas, see note 4 above, 32.01.

[9]       Representations and warranties insurance in M&A transactions, (last visited June 30, 2018)

[10]      Thomas,  see note 4 above, s 32.02

[11]      International Risk Management Institute, Inc, (last visited Jan 17, 2018).



[14]      Knepper & Bailey, see note 3 above, s 28.09.

[15]      Knepper & Bailey, see note 3 above, s 28.09.

[16]      Ageas (UK) Ltd v Kwik-Fit (GB) Ltd, [2014] EWHC(QB) 2178, [1] (Eng).

[17]      Ageas, [2014] EWHC(QB) 2178 at [10].

[18]      Ageas, [2014] EWHC(QB) 2178 at [11].

[19]      Ageas, [2014] EWHC(QB) 2178 at [16].

[20]      Ageas, [2014] EWHC(QB) 2178 at [2].

[21]      Ageas, [2014] EWHC(QB) 2178 at [14] (citations omitted).

[22]      Ageas, [2014] EWHC(QB) 2178 at [20] (emphasis added).

[23]      Ageas, [2014] EWHC(QB) 2178 at [16].

[24]      Ageas, [2014] EWHC(QB) 2178 at [41].

[25]      Ageas, [2014] EWHC(QB) 2178 at [48].

[26]      Ageas, [2014] EWHC(QB) 2178 at [50].

[27]      Ageas, [2014] EWHC(QB) 2178 at [52].

[28]      Ageas, [2014] EWHC(QB) 2178 at [53].

[29]      See, eg, Nat'l Union Fire Ins Co of Pittsburgh, Pa v TransCanada Energy USA Inc, 119 AD.3d 492, 493, 990 NYS.2d 510, 511–12 (NY App Div 1st Dep’t 2014) (‘Documents prepared in the ordinary course of an insurer’s investigation of whether to pay or deny a claim are not privileged, and do not become so “merely because [the] investigation was conducted by an attorney.”’) (quoting Brooklyn Union Gas Co v American Home Assur Co, 23 AD.3d 190, 191, 803 NYS.2d 532 (NY App Div 1st Dep’t 2005)); Charter Oak Fire Ins Co v Am Capital Ltd, No DKC 09-100, 2013 US Dist LEXIS 180523, at *5 (D Md 24 July 2013) (investigation during claims handling is done in the ordinary course of business and does not reap benefit of attorney-client privilege); Barnard Pipeline Inc v Travelers Prop Cas Co of Am, No CV 13-07-BU-DLC, 2014 US Dist LEXIS 53778, at *8 (D Mont 17 Apr 2014); Butler v Am Heritage Life Ins Co, No 4:13-CV-199, 2016 US Dist LEXIS 10464, at *14 (ED Tex 29 Jan 2016).

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