Trends in Insurance Disputes Over Seller Misrepresentations in M&A
Insurance companies and corporate policyholders are increasingly turning to litigation to resolve disputes over coverage related to seller misrepresentations in mergers and acquisitions (M&A). Traditionally, these disputes were settled through arbitration due to specific clauses in representations and warranties policies. This limited the number of public court cases, and arbitration itself was not commonly pursued.
Industry data shows a significant shift, with formal dispute resolutions like arbitration or litigation nearly doubling over the past year, notes Euclid Transactional President Phil Casper. Euclid, a provider of transactional insurance, reported over $1.5 billion in claims paid from these policies over eight years, marking an increase of $500 million from the previous year.
Legal Developments Highlight Trends
Recent legal proceedings emphasize this trend. A notable case involved the Delaware Superior Court’s mixed ruling on a dispute between Surteco North America Inc. and an AIG unit. Surteco sought insurance coverage following its acquisition of Omnova Solutions Inc., alleging non-disclosure of crucial customer information. The court found no material adverse effect on business during the coverage period but recognized a breach in Omnova’s representation regarding its customer data.
Industry experts foresee more frequent court decisions addressing these matters. For instance, AIG was embroiled in Delaware litigation involving a breach of purchase agreement claims related to a transaction between Hartree Natural Gas Storage LLC and a storage facility, leading to unresolved factual issues and a subsequent withdrawal of claims against AIG by Hartree.
In another case, a New York court's 2020 decision against a Chubb Ltd. unit highlighted ambiguities in policy language, resulting in a settlement. This interpretation remains one of the few decisions addressing such policies directly, as observed by Carrie DiCanio, a partner at Haynes and Boone LLP.
Shifts in Dispute Resolution Dynamics
Experts predict an increase in court-mediated resolutions as representations and warranties policies evolve. Sarah Mitchell of Vinson & Elkins LLP suggests these policies might face more legal challenges in court due to clauses allowing both litigation and arbitration.
Currently, around 1% of these insurance claims proceed to formal dispute resolution, often settled during the initial claims process. However, this figure might rise to 5% in the coming years, according to Mitchell. The extended claim periods in these policies, typically three to four years, offer alternatives to protracted indemnity disputes, as noted by Andrew Shapiro of Pierson Ferdinand LLP.
While arbitration is often favored for its focus on specialized financial issues, some policyholders prefer court proceedings, hoping for favorable judgments from less specialized judges or juries. Whether through arbitration or litigation, the likelihood of formal disputes is expected to rise as more companies adopt these policies, according to Phil Casper. He pointed out the inherent role of insurance providers in facing legal challenges, as policies aim to leverage insurers' substantial resources.