Consider a buyer (B1) who is insured for the acquisition of a target business under an existing W&I policy. B1 is looking to onsell this target business to a subsequent buyer (B2). Note that a subsequent transaction may eventuate at the parent level, target level, and/or the buyer insured level. Here, we are addressing a transaction and sale at the target level from B1 to B2 (the subsequent transaction). The question arises as to whether B2 can claim against B1’s W&I policy.
There are a few key considerations around the response of the existing W&I policy, as discussed below:
- The W&I insurer will need to rely on B1’s deal team and the actual knowledge of these members, which is different to B2’s deal team in respect of the subsequent transaction. This is a critical and pivotal point that is underpinned by a foundational principle of W&I policy response, i.e., actual knowledge of the deal team members with respect to a breach of warranty excludes cover.
- The existing W&I policy responds to a breach of insured warranties given at the signing date and at the completion date under the previous transaction. Warranties under the subsequent transaction are given at different signing and completion dates that are subsequent to the previous transaction. The warranties (even if identical to the previous set), are therefore operational at subsequent dates and breaches that occur post completion of the previous transaction will not be covered under the existing policy. This would result in exposure for breaches that occur post completion of the previous transaction.
- In the event of a W&I claim, an underwriter will be required to assess whether the matter was fairly disclosed in the buy-side due diligence. Under the existing W&I policy, underwriters are informed by B1’s due diligence exercise and not B2’s. Whether matters were fairly disclosed to B2 and B2’s knowledge cannot practically be informed by B1’s due diligence exercise and the seller disclosures that they relied on, as B2 will not typically have access to B1’s due diligence reports nor its previous deal team members.
B1 can retain their W&I policy to protect against claims made by B2 with respect to the target. In some cases, the insurer which issued the existing W&I policy may offer to underwrite the subsequent transaction on an expedited basis for a material premium discount. This would be due to their familiarity with the target business and underwriting comfort gained over the course of the previous underwrite. If they do so, the relevant insurer may require that the existing W&I policy is cancelled, typically to avoid aggregation of losses under both policies. The approach to handling such circumstances may vary and a robust marketing exercise can inform this assessment.
This discussion does not relate to assignment of the Policy in circumstances where there is a change in ownership of the buyer/insured group. There are specific rights of assignment with respect to the W&I policy subject to the specific terms and conditions.
Separately, where there is a change in control of the target company at the parent level it is relevant to consider the relevant qualifications and limitations impacting the seller’s liability. The W&I policy may not trigger, particularly in circumstances where the seller’s liability is extinguished. Please refer to our article that discusses this further.
We invite your comments and questions on this topic, including your views on alternate approaches.
