News & Views

O’Connors warns about W&I insurance policy wordings

Liverpool and London-based law firm, O’Connors, has issued a warning to professional advisers arranging Warranty & Indemnity (W&I) insurance policies in the context of corporate transactions to pay close attention to policy wordings or risk leaving clients unprotected. The warning comes as significant claims are now coming in and policy wordings are being tested by the courts.

The recent Court of Appeal decision in Project Angel Bidco Ltd (In Administration) v Axis Managing Agency Ltd [2024] is a case in point and is troubling for both buyers and sellers seeking to hedge risk through insurance. By majority, the Court of Appeal found in favour of the underwriters, such that the W&I policy would not cover the buyers’ losses.

W&I insurance policies are a mechanism for re-allocating risk arising from an M&A transaction. In the last decade, they have become an increasingly popular choice both buy-side and sell-side, particularly in large-scale transactions.

Although the buyers in the Project Angel BidCo case may still have recourse against the sellers, this was not, in our view, the intention of the parties on completion. Perhaps controversially, we prefer the dissenting judgment of Phillips LJ, which we consider more accurately applies the commercial purpose and intended effect of the policy.

Buyers and sellers have different drivers for using W&I insurance. A seller may want the cover to limit its exposure under the acquisition agreement and achieve a clean exit by freeing up the sales proceeds. A buyer may want the cover if it does not have faith in the strength of the covenant being given by a seller with a poor balance sheet, or if there are robust caps on the seller’s liability in the acquisition agreement.

Our previous article explains the value of getting an insurance lawyer involved in the review of W&I policy wordings. After all, parties who have invested in W&I cover should be able to rely on that cover to respond when things do, unexpectedly, go wrong.

The Project Angel Bidco case

The issue on appeal was the extent of cover provided by a buy-side W&I policy. The policy was taken out in connection with the acquisition of a construction company and the SPA included typical Anti-bribery and Corruption (ABC) warranties. The buyer subsequently issued proceedings against underwriters claiming £5 million in connection with alleged breaches of the ABC warranties.

The issue of interpretation centred on whether there had been a mistake in the drafting of the definition of ‘ABC Liability’.  The buyer argued that there was a typographical error, and that the policy should have read ‘Liability for...’ rather than ‘Liability or…’. The effect of this alleged omission would significantly alter the meaning of ‘ABC Liability’ and consequently the breadth of the exclusion.

Underwriters were successful in arguing that the policy should remain as drafted with the exclusion being so wide as to effectively negate the inclusion of the ABC warranties as ‘covered’ at all.

What was the judicial reasoning for the decision?

Lewison LJ held that:

• To correct a drafting mistake by interpretation, it is necessary not only that the mistake must be clear, but also that the cure must be clear.
• Interpretation of the policy is an iterative process, which requires a consideration of the policy as a whole.
• Although there was an apparent conflict (at least in part) between the inclusion of the ABC warranty in the Insured Obligations on the one hand, and the breadth of the ABC Liability exclusion on the other, he was not persuaded that there was a clear drafting error. The existence (from the point of view of the underwriters) of a coherent and rational explanation for why the ABC Liability exclusion took the form that it did was, in his view, a strong pointer against the conclusion that there was an obvious drafting mistake.

In contrast, Phillips LJ preferred the buyers’ arguments and, in our view, took a more common-sense approach. In his judgment, reading the exclusion as ‘Liability for...’ rather than ‘Liability or…’ was consistent with the commercial sense of the overall structure of the transaction. The Sellers should be able readily to identify, from the Cover Spreadsheet, from which warranties they were and were not effectively released.

So, what can we take from this?

Courts will be reluctant to use their interpretive powers to come to the aid of a policyholder in a business-to-business transaction. For this reason, it is imperative to have a close eye on the policy wording as a whole, not just a brief look at the cover schedule and the price tag. The devil truly is in the detail, and it is important to ensure that that detail is carefully drafted and well understood.

A W&I policy is often negotiated within a tight timeframe by an advisory team who are heavily immersed in the transaction. By adding an experienced insurance lawyer to that team who can collaborate with the deal advisers and brokers, the team will benefit from a much clearer picture of what is insured, what is not insured, and provide comfort that the policy will respond if called upon.

For further information, please email Sally Lazar or call 0151 906 1000.