AIG, in its recently published 2017 M&A Claims Report, explored the rising number of representations and warranties (R&W) claims in the M&A market by examining AIG policies written between 2011 and 2015.
Increase in R&W claims
Mary Duffy, AIG's global head of M&A insurance, posits that the marked increase in claims could stem from buyers becoming more knowledgeable of R&W insurance policies. Darren Savage, AIG's Asia-Pacific M&A manager, agrees that buyer familiarity, fostered by repeat business, has created sophisticated consumers who are thinking more critically.
Duffy also notes that larger deals are those facing the greatest claims rates, making them higher risk transactions. Maria Jose Cruz, South Europe M&A manager, echoes this statement, explaining that big deals are often, necessarily, more complex. The intricacies of such agreements frequently open parties up to unforeseen liabilities, if only because their sheer scale precludes exhaustive due diligence. When combined with demands for accelerated transactions, such scope can easily result in things slipping through the cracks.
Most common R&W breaches
Another vulnerability arises out of any given deal's global spread. Operating in multiple jurisdictions exposes companies to an array of both localized and intersecting risks and issues. The report found that "Financial Statements" and "Compliance with Laws" were the two most predominant breach types among reported incidents, the latter highlighting the difficulties that arise when bridging jurisdictional requirements.
Occurrence of R&W claims
The report notes that half of all R&W claims arise within a policy's first year of operation, particularly within the first 6 months. Furthermore, fewer sell-side policies are taken out, yet they produce more claims, suggesting that buyers are more comfortable with relying on R&W insurance rather than seller indemnity. Thus, companies should anticipate claims developing early and quickly amongst their educated buyers.
Growth of R&W insurance product
Overall, the R&W insurance product's maturation is evident in both the breadth and increasing volume of claims being made. More broadly, the M&A market is experiencing paralleled growth and development, with R&W policies serving as a dynamic tool for controlling often unseen risks in globalized and complex business networks.
The author would like to thank Sarah Pennington, Summer Student, for her assistance in preparing this legal update.
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