July 6, 2023
RWI: 2023 Guide to Rep & Warranty Insurance
Woodruff Sawyer recently published its 2023 Guide to Representations & Warranties Insurance, which provides an overview of current market conditions, policy terms and considerations for potential purchasers of RWI. In light of commentary suggesting a tightening claims environment, I thought what the report had to say on claims was pretty interesting. Here’s an excerpt:
Halfway through 2023, we’ve found the rate of claims has been relatively consistent with previous years, while the number of claims has increased. This increase is largely attributable to the surge of M&A activity in 2021. However, we have seen interesting shifts emerging in the timing of claims noticed, types of claims filed, and areas insurers will expect heightened diligence in the future.
Timing of Claims Noticed – Historically, most claims have been noticed within the first year after binding. However, in 2022–2023, an increasing number of claims were noticed between 12 to 18 months post-close.
Types of Claims Filed – First-party, or indemnification, claims (where the insured brings a claim directly to the carrier) remain more common than third-party claims. However, third-party claims are on the rise for 2023 and will likely continue to uptick. Of the most frequently cited first-party claims, breaches of the financial and material contracts reps continue to involve the greatest potential for loss and are the claims most likely to exceed the self-insured retention (SIR), which is the portion of cost the insured must bear before the R&W policy responds.
Heightened Diligence – Data security/privacy breaches are hot on the heels of financial statements and material contracts. Carriers are increasingly concerned about the adequacy of cyber coverage, and buyers should expect this to be an area of heightened diligence. It is crucial that buyers understand the far-reaching implications of insurance diligence. In the haste of M&A deal flow, buyers can neglect to conduct adequate insurance diligence on the target company. Likewise, many purchase agreements lack clear and concise insurance representations by the sellers.
The Guide also discusses the frequency of the breaches reported in RWI claims, and notes that reps & warranties concerning financial statements, data security & privacy, employee benefits and employment top the list.
– John Jenkins