M&A: A rising tide of large claims
Warranty and indemnity insurance (W&I cover) provides buyers and sellers with a way to reduce their transaction risks, and also facilitates a clean exit from investments for both sides. This is particularly important in an uncertain economic environment, even if global M&A activities are rather subdued at the moment.
The current edition of the AIG M&A Claims Intelligence Series shows that W&I insurance offers potential for both major claims and basic losses, and that it covers a multitude of transaction problems.
For example, the study shows that the amount of damage continues to rise, whereby the largest claims payments (over USD 10 million) account for 19% of claims, compared to 15% in last year’s study and 8% in the year before. The average amount of damage has also risen in this segment.
Managing M&A claims becomes particularly important in the context of rapidly increasing M&A claims
Alexander Nagler, Managing Director AIG DACH, reports on his experience in this area.
One of the major concerns that policyholders have when purchasing W&I insurance is how such claims will be managed. In the event of a warranty breach, the policyholder wants to know what he can expect from his insurer if he submits a notification of claim in the context of his W&I policy.
Therefore the insurer's experience with claims and the process for settling the claims should be the policyholder’s main decision criterion when purchasing W&I insurance. Of course, price and the scope of the insurance cover also play an important role, but since the entire objective of the policy is to offer cover and assistance in the case of a justified claim, the insurer's understanding of claims settlement can help the policyholder make informed decisions and ensure that each notification of claim is processed as smoothly and efficiently as possible.
To assist buyers of W&I insurance policies, I would like to illustrate the general process for a typical claims settlement below. As a policyholder, I would like to provide you with important information about submitting notifications of claim in the context of your policy.
Overview of claims settlement process
To settle a claim, it is best when the policyholder, insurance broker and the insurance company work as a team. The submission of a claim and the review of cover should not be viewed as adversarial processes. It is well known that M&A transactions can be quite complicated and involve a lot of money, therefore the submission of notifications of claim in the case of W&I insurance can also be complex. But for the most part, it will involve the following five steps for policyholders:
1. Receipt and confirmation of a valid notification of claim
- The insurer receives the notification of claim from the policyholder (or insurance broker) and assigns it to an adjuster. The process for settling the claim can vary between insurance companies. AIG's internal claims management team includes experienced adjusters from across Europe. They have local knowledge and expertise about managing M&A claims, including the management of primary policies, which they can draw on to review the claim and make decisions. Insurers without a local presence, which do not have an internal claims management team or that can only offer limited experience in the case of a claim, may engage an external consultant to process the entire claim on their behalf.
- The adjuster will confirm receipt of the notification of claim and will also note whether the notification is consistent with the time- and content-related provisions in the policy that apply to the notification of claim.
2. Inspection of notification of claim and request for additional information
- The adjuster begins by examining the notification of claim. In the ideal case, the M&A adjusters work closely with the underwriting team to quickly obtain a detailed understanding of the transaction and to develop some understanding of the cover.
- If required, the adjuster will request more information from the policyholder to determine what the latter expects from the cover under the policy, or to assess the value of the damages. In this, he works closely with the policyholder (often with the involvement of the insurance broker) to collect additional required information.
3. Third-party claims
- For the case that the notification of claim relates to third-party claims, the insurer regularly has the right (in accordance with the wording of the policy) to participate in such a claim, and he may require that such disputes can only be settled with his approval. Usually, the policyholder may not do anything that could adversely affect the insurer's rights against possibly involved third parties.
4. Legal advisors and financial experts
- The insurer may ask a legal advisor and/or financial expert to help with the review of the notification of claim. Using legal and financial advice, the insurer is able to determine what is covered under the policy, particularly in complex cases or for complicated damage assessments.
5. Cover decision and payment of claim
- When the insurer determines that the claim is covered by the policy, he will confirm the cover to the policyholder and the insurance broker. In the event that the claim is not (or only partially) covered, the insurer will provide detailed reasons for his decision regarding the cover, and he may discuss this decision with the policyholder to confirm his position.
- In some cases, the insurer may quickly conclude that a breach of guarantee has occurred. But it may take longer until the extent of the loss can be quantified. Since such an assessment is not always easy, the insurer will work with the assigned expert and the policyholder to calculate the correct claims amount.
- Once the amount has been finalised, the insurer will arrange for the payment of the claims amount as soon as possible.
Submitting a notification of claim –
Important information from the insurer
As insurers, we are aware that our policyholders want claims to be settled as soon as possible. Therefore our claims settlement process is designed in such a way that our cover position can be confirmed as quickly as possible. Of course, a well-prepared notification of claim goes a long way towards ensuring that a cover decision can be made in due course. Against this background, I have prepared the following information that policyholders should observe when they wish to make a claim in the context of their M&A insurance policy.
1. Corse of Time
It hardly needs saying that claims that are submitted in the context of the policy must have originated during the contract term of the policy. It is also important that a notification of claim is promptly submitted to the insurer during the term of the policy. The wording of a W&I policy regularly stipulates that the policyholder must submit a notification of claim as soon as possible after the damages become known, possibly within a certain number of days.
2. Delivery
Please also verify whether there are certain requirements for how a notification of claim should be submitted to the insurer. In the present situation, and considering that many of us are working at home at the moment, it may be more difficult to send items by post (if sending by post is a requirement). If applicable, ask your insurer whether he will accept delivery by e-mail (which is probably also more convenient for him). Also speak with your insurer about the best delivery method for other documents.
3. Detailed information
Make sure that your notification of claim includes a detailed description of the pertinent facts and circumstances that are related to the damages, and that the guarantees and compensation that in your view were not provided follow from this information. At that time, you may not be aware of all of the relevant information, but when you provide the insurer with a detailed list of available information, it not only satisfies the typical requirements under the policy but also helps the adjuster with limiting his inquiries to the other required information, allowing him to concentrate on the important questions regarding the cover decision.
4. Relevant documents
If you have relevant documents connected to a notification of claim (e.g. court documents, important contracts, tax assessments, expert appraisals or correspondence), please attach copies of these documents; the adjuster can probably submit a cover position much faster if he receives this information right away. The insurer may have more questions, or he may require additional information. However, if you attach everything that you believe the insurer will require to the notification of claim, it will almost certainly contribute to a smooth claims settlement process.
5. Initial discussion re: notification of claim
If you believe that it would help to discuss the notification of claim over the telephone at the beginning of the process, for example if there is a lot of background information, your insurer will often be grateful to have such a discussion together with your insurance broker and possibly a legal advisor. As noted above, all parties should work together in this process, as early communication for all important points or particular questions can help with the settlement of the claim.
A strong M&A claims management team
A strong M&A claims management team consists of a global network of in-house claims experts who are supported by dedicated legal advisors. The adjusters should have experience in major claims and should specialise in M&A notifications of claim.
That sounds like it should be a matter of course. But it is not, even though it is of fundamental importance.
Feel free to ask your insurer.
Alexander Nagler