Do Reps and Warranties Insurers Pay Claims?

Law firm Lowenstein Sandler has just published a report, Getting Paid: A Look at Representations & Warranties Insurance, that explores whether insurances companies actually pay reps and warranties (R&W) claims.

According to Lowenstein Sandler 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 amount. But more than two-thirds of respondents said that all claims fall within retention – and therefore do not result in payment by insurers.

The report was authored by Lynda Bennett, partner and chair of Lowenstein’s insurance recovery group, and Eric Jesse, counsel in the group.

“R&W insurance has become increasingly popular in recent years, but little was known about insurers’ claim payment histories,” said Ms. Bennett. “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 also uncovered other 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 as follows:

  • 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 3 and 12 months after that for an insurer to provide its coverage position, and 71 percent said it takes 6 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 healthcare (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.

Lowenstein Sandler is a national law firm that is active in virtually every sector of the global economy, with particular emphasis on investment funds, life sciences, and technology. The firm has over 350 lawyers based in New York, California, New Jersey, Utah, and Washington DC.

The survey, conducted in 2020, gathered input from 149 executives involved in the R&W insurance market including buyers (private equity funds, investment banks, and operating companies) and sellers (insurance companies and insurance brokers).

To download a copy of Getting Paid: A Look at Representations & Warranties Insurance, click HERE.

Private Equity Professional | August 20, 2020

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