Q&A: Liberty Global's Simon Radcliffe on W&I claims

Unquote: A Liberty-led consortium of insurers recently paid out €50m to a private equity buyer under a warranty and indemnity (W&I) policy. How significant is that particular case from your point of view?

Simon Radcliffe: It was indeed an important milestone: both for us and the wider W&I insurance market. First and foremost, the payout highlights the value of W&I insurance as a means of helping a buyer recover and move forward as fast as possible following a loss. The speed with which the payment was made – less than 10 months – also demonstrates that the key to the outcome of a claim of this nature is often in the experience and responsiveness of the relevant insurance carrier and its claims handling team. I think buyers are becoming much more cognisant of this and it's why we have claims counsels embedded in both our European and US teams who are dedicated solely to responding to M&A claims. It is unique in our industry.

Unquote: Beyond this high-profile case, there are suggestions that claims under W&I policies are becoming more common in the current M&A landscape. Is that the case, and if so what would you attribute that to?

SR: Yes, but the first thing to point out is that this is not due to a change in the fundamentals around transaction risk – properly underwritten deals have not suddenly become riskier to insure. In our experience, the single biggest factor behind the increase in claims activity is the rise in the volume of policies being written. This increased demand for the W&I product has arisen from the fact that buyers and their advisers have become more aware of how the product operates; and thus more systematic in assessing whether they have potential policy claims post-acquisition.

Unquote: Have you seen any particular trend emerging when it comes to the factors likely to trigger a claim that both buyers and sellers should be aware of?

SR: Claims relating to a breach of the financial statements warranties continue to be common and the value of these claims can be significant. In terms of emerging trends, we have seen a number of claims in the last 24 months relating to licensing issues identified during software vendor audits. These audits – which appear to be growing in frequency – often reveal a shortfall (of varying severity), resulting in the compulsory purchase of new licences and/or the imposition of penalties. It is an area that we expect to see more focus on during the due diligence process as businesses become more digitally enabled.

Unquote: The number of insurers active in the market, and the array of products offered, has grown substantially in recent years. Is that making the market harder to navigate, both for the insurers and the insured?

SR: There is no doubt that competition has increased, fuelled in part by the rapid growth in the number of managing general agents (MGA) in recent years. From the perspective of the potential buyers, more competition can be a good thing; for example, it tends to drive more competitive prices. It is worth buyers bearing in mind, however, that MGAs are not the "risk-taker" for the purposes of the policy, and will (usually) have little or no authority to settle a claim, instead needing to refer settlements back to their panel of capacity providers, which might lead to a protracted and unpredictable claims process, for instance if they have no specialised M&A experience. In this sense, it is essential for a buyer to understand who is underwriting the risk, and their M&A claims handling capabilities, as this all feeds into the buyer's claims experience.

Unquote: What are your predictions for the future?

SR: It is likely that the W&I market will see more large losses in the near term as the volume of deals increases, and a key issue will be how insurers behave in response, especially some of the newly established players who are still growing their books and may not have built up enough accumulated premium income to be comfortable paying a large claim. In this sense, the product is entering a critical phase, and the likely result will be a shift in the mindset of buyers when selecting which insurer to partner with, both with regard to claims service, and the willingness and ability of insurers to honour claims whatever their size.