Lowenstein Sandler has released Getting Paid: A Look at Representations & Warranties Insurance, a new report based on a survey that, among its many goals, sought to answer a key question about reps and warranties (R&W) insurance: Do insurers actually pay claims? The answer, according to the report, is “yes” with some important caveats. Eighty-seven per cent of respondents said at least a partial payment was negotiated for all R&W claims that exceeded the self-insured retention. 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 A 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,” Bennett says. “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, conducted in 2020, gathered input from 149 executives involved in the R&W insurance market across its key stakeholders: the buyers (private equity funds, investment banks, and operating companies) and sellers (insurance companies and insurance brokers). It offers a well-rounded view of the trends and differences experienced by leading players in the market.
The survey uncovered 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.
A plurality (41 per cent) 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 per cent of respondents said it takes between three and 12 months after that for an insurer to provide its coverage position, and 71 per cent said it takes six 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 per cent). Next were technology (29 per cent) and health care (28 per cent).
A majority of claims stem from deals with seller indemnification, as sellers have recognised 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.