What Happens after the Deal Closes – M&A Representation and Warranty Insurance Claims

By John J. Koeppel

June 10, 2016 | Corporate Blog

In certain deals, we continue to see an increase in circumstances when a party obtains a representation and warranty insurance policy. The question that deal counsel (and others) are often asked is – what types of claims are being made on such policies? Here are some of the statistics from a recent piece by AIG[1]:
• The most commonly alleged breaches under a M&A representation and warranty policy were for the following representations: financial statements (28%), tax information (13%) and contracts (11%).
• The remaining common categories of representation and warranty breaches were intellectual property (10%), employee matters (8%), litigation (8%) and compliance (5%).
• Approximately one in every seven policies issued reported a claim. 
• The probability of a claim being filed against an R&W policy varied by the size of the deal covered, with deals under $100 million having a slightly higher claim probability.
• From a timing standpoint, more than half of all claims reviewed were reported within the first year after a deal closed, and 74% were filed within the first 18 months. 
• While the majority (about three-quarters) of policies were purchased by the buyer, seller-purchased policies tended to have a more likely rate of a claim being reported (19% vs. 13%).
• That said, policies purchased by buyers were more likely to have a large loss as the majority of the top 15 largest claims reported during the study’s review period belonged to buyer-side policies.

[1] Statistics from an Article entitled What Happens After the Deal Closes, American International Group, Inc., January 2016.  The article references data from a 2011- 2014 time frame

Disclaimer: The information in this post is provided for general informational purposes only, and may not reflect the current law in your jurisdiction. No information contained in this post should be construed as legal advice from our firm or the individual author, nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this post should act or refrain from acting on the basis of any information included in, or accessible through, this post without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient’s state, country or other appropriate licensing jurisdiction.

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