Buyers in M&A transactions are finding it harder to get their representations and warranties insurance claims paid after there’s been a seller breach, a report by Lowenstein Sandler says.
Although 60% claims get paid above the deductible, what the industry calls the self-insured retention (SIR) level, that is down from 87% just three years ago, when the firm first surveyed market participants.
What’s more, getting that payment takes longer and requires a more adversarial process, the firm says. That suggests the relatively young R&W industry still has a ways to go before it becomes a more commercially practical replacement for seller indemnifications.
“Players in the M&A space expect speed, return on investment, and rational commercial behavior,” the report says. “They do not have time for, or interest in, litigation or ‘re-due-diligencing’ the deal through an insurance claim process.”
R&W insurance became a go-to means of risk transfer about a decade ago in response to a trend among sellers to limit how much they would indemnify buyers if representations they made to close the deal are breached.
“By 2020, RWI had become a staple of M&A transactions because sellers required a swift and permanent exit from the transaction — and, given the frenzied pace of deal flow and heightened competition in the market, they could demand it,” the report says.
Insurance providers did a good job of matching the speed of their underwriting to the speed of the deals so buyers could make competitive bids on companies without getting bogged down in risk issues associated with seller breaches.
“The not-so-secret success of RWI is that … it was born out of the fast-paced world of deal-making [by offering] commerciality, reasonableness, and speed,” the Lowenstein Sandler report says.
When it comes to paying claims, though, the trend lines appear to be moving in the wrong direction. “If R&W insurers fail to respond to buyers’ needs for speed, ROI, and rationality in the claims handling process, they run the risk of killing the goose that laid the golden egg,” the report says.
Among other things, it takes longer to get paid after a claim is filed, the process is more adversarial and resource-intensive, and payment values are down.
Although insurers typically say they’ll provide their coverage position 45-60 days of claim filing, in reality it takes six months or more, more than 50% of respondents said in the survey. That’s up 5 percentage points from three years earlier.
Only 8% said the claim position was provided close to the 45-60-day period.
And then to get paid, it took more than a year in upwards of 50% of cases. And in 10% of cases, it took between two and three years.
Insurers are also pushing back against claims more aggressively. They challenged policyholders on whether there was even a breach 40% of the time, up from just 15% three years earlier.
Insurers challenged the loss amount 47% of the time, up from 28%.
In addition, insurers failed to consent to settlements in 33% of cases, up from 18%, and insurers pointed to late notice as a reason to avoid payment in 20% of cases, up from 13%.
Among other reasons insurers challenged losses:
- Lack of information: 49%
- Dispute over multiples: 48%
- Disputes over valuation methods: 42%
- Failure to show permanent impairment: 38%
These trends are moving in the wrong direction if the still-young industry wants to solidify itself as the go-to alternative to seller indemnification, the Lowenstein Sandler report says.
“R&W insurers will be well-served to implement an immediate course correction so that consumers of the RWI product continue to see value in it,” it said.