Special Issues in Connection with Warranty and Indemnity Insurance

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Insurance offerings have dramatically transformed M&A transactional practice. Whether obtained by the buyer or the seller, insurance offers the possibility of externalising the risks associated with certain representations and warranties. Where difficult issues or the risk aversion of either party may have blocked a transaction in the past, insurance now greases the wheels.

There have been only a handful of reported M&A disputes involving insurers, but it is nevertheless clear that warranty and indemnity (W&I) insurance[2] will also affect M&A arbitration practice. In particular, in many instances, the W&I insurance is the exclusive recourse for certain warranties of a seller.[3] This form of insurance has become widespread and the number of claims raised under W&I policies is significant.[4] The overwhelming majority of these insurance claims are satisfied under the policies or settled, but some are disputed. Little data is published regarding the number of claims under W&I policies that result in arbitration or litigation. Anecdotally, the authors have heard that the number of disputed claims, while still small, continues to rise. Although 2021 turned out to be a bumper year for M&A, the consequences of the Ukraine war, supply-chain disruptions and inflation may compound the effects of the continuing covid-19 crisis. These cumulative effects may in turn increase the proportion of distressed transactions, which may allow for less due diligence and may entail higher risks.[5]

Whatever the figures, the numbers and the effects of W&I insurance on arbitration practice will increase in the coming years. The impact will be felt in both the transaction phase and any dispute phase. In the transaction phase, the insurers’ and underwriters’ counsel typically double-checks the due diligence performed by the buyer and influences the drafting of the deal documents.[6]

In the dispute phase, the buyer will generally raise claims in respect of insured representations and warranties directly against the insurer[7] under the W&I policy (instead of against the seller under the sale and purchase agreement (SPA)). In the following, we refer to this as an ‘M&A insurance arbitration’. Where there are multiple insurers, the buyer may need to raise claims against each, either individually or in a consolidated proceeding. Finally, as discussed below, although there have not yet been any reported cases, it is possible that a buyer may attempt to consolidate insured claims against the insurer under the W&I policy and uninsured claims against the seller under the SPA into a single proceeding or conduct separate proceedings concurrently.

This chapter seeks to identify some of the possible effects of this development in M&A arbitration and tentative solutions, including points for consideration for arbitration clauses.

We also consider the extent to which these issues are new or whether there are analogies that may be helpful; for instance, claims involving indemnification or subrogation. In such cases, the seller often has the right to participate in or assume the right from the buyer to defend against the third-party claim. One of the differences in the case of M&A insurance arbitration is that the insurer does not merely have a duty to step into the shoes of the seller; the SPA and the W&I insurance policy generally require that the buyer seek recourse solely against the insurer under the claim procedure in the policy (bypassing the seller altogether). Exceptions apply, for instance, if the claim is uninsured. An M&A insurance arbitration is similar to indemnification or subrogation disputes in that the party ultimately paying has the right to conduct the defence. However, in the typical indemnification or subrogation situation, the party ultimately paying is the party responsible for the claim and most knowledgeable regarding the facts and circumstances. In the W&I insurance situation, this is seldom true: the seller invariably has better knowledge of the claims than the insurer.

Additional issues may arise in connection with an M&A insurance arbitration – these include coverage issues under the applicable substantive insurance law and procedural issues where a number of insurers are involved.

Primer on structuring W&I insurance policies

In larger transactions, one typically encounters multiple insurers and policies. There is a limit to the amount of coverage that any individual insurer will underwrite, for example, €30 million.[8] If additional coverage is sought, the insurance is typically structured in layers, with each layer being insured separately by one or more insurers. Together, these policies build what is referred to as the ‘insurance tower’.

The insured typically agrees to a deductible. Above the deductible, there is the primary layer, with a first, second or additional excess layers above that. Imagine a medieval tower with a spiral staircase and guards at each landing. If each landing represents the attachment point of the coverage layer above it, the guard at each landing represents the threshold issue to be proved before the insured may proceed: even if the claim is covered by the policy, coverage of a layer is triggered only if the insured proves that the quantum exceeds the attachment point.

Insurers in the top excess layer are likely to take the position that they should remain undisturbed until all skirmishes involving the lower layers have been resolved, with only the largest and most successful claims able to fight their way to the top of the tower. This can be likened to successive dispute resolution proceedings. However, the insured may prefer for all insurers to come down from their tower and face off on level ground in a single battle (consolidated proceedings) with not only the insured but also the buyer, who in our example is asserting the claims.

Each layer may be insured by a single entity, a group of insurers, or by a combination of such policies. In the case of a group, the insured may enter into bilateral policies with each insurer or with a number of insurers. The insurers in a specific layer may be jointly and severally liable in the case of a group or syndicate approach or not, in the case of individual policies.

Each layer is priced differently based on the risk profile. Premiums for the primary layer (which is more likely to be called on) may be twice as high as those in the higher layers. Within a layer, insurers may act as a syndicate, each insuring part of the same layer of risk jointly and severally. The applicable substantive insurance law will define the types of insurance contracts and the liability of the insurers.

The insurance coverage is typically arranged by a broker on the insured’s side, who negotiates with arrangers on the side of the insurers. If issues of contractual intent arise, for instance whether or not the parties contemplated consolidated arbitration proceedings, many of the parties may not have considered the point at all.[9]

An insurance tower of, say, €300 million might involve anywhere from five to 50 or more insurers, depending on the structure. Although an insured might prefer a simpler structure with fewer contractual partners with a view to future claim handling, the involvement of multiple insurers may ultimately reduce risk for the buyer. Moreover, the party seeking W&I insurance in the final days of a transaction is likely to have little leverage to influence the structuring of the tower and may well have to focus on more direct issues relating to the transaction itself.

Negotiation and due diligence

The risk covered by W&I insurance will generally relate to the classic representations and warranties in an SPA. Those representations and warranties are usually subject to detailed negotiation and to extensive due diligence. Adopting W&I insurance introduces one or more third parties into that process.

Insurance companies generally engage experienced M&A lawyers to review the due diligence conducted by the buyer (underwriters’ counsel). However, insurers are generally granted access only in the final stages of a transaction and typically have only days, or at most one to two weeks, to complete their due diligence or to review the due diligence carried out by the buyer, evaluate the risks and decide which warranties and indemnities to insure. Moreover, that review may be secondary and involve a review of the buyer’s counsel’s review rather than a review of the primary material that may be in a data room, for example.

The questions to resolve will include whether the interests of the transaction parties and the insurer are aligned; whether the availability of insurance reduces the buyer’s incentive to conduct a thorough due diligence procedure;[10] and whether insurers improve the fact-finding process because they are a second set of eyes and more professional and objective than the transaction parties.

How the involvement of W&I insurers will influence the transaction process is a matter for debate. Insurers have less of a stake in the transaction being completed and are focused solely on risk. If the seller is the insured, the insurers will generally wish to be certain that all relevant disclosure is documented and appropriately reflected in the SPA and disclosure schedules. With respect to representations qualified by the seller’s knowledge, however, sellers may have less of an incentive to acquire knowledge of relevant facts at the target. Buyers may be less objective than insurers, focused as they are on factors such as opportunities or synergies with their existing businesses. Where, as in UDP Holdings,[11] the buyer is the insured but the policy is obtained at the cost of the seller, the incentives may be expected to be closer to those of where the seller itself is the insured with respect to warranty claims.

Whether the W&I insurance is procured by the seller or the buyer, and at whose expense, there are issues as to confidentiality[12] and expertise[13] that must be dealt with.

Do insured sellers grant more generous representations and warranties than they would if they bore the full risk?[14] Where the seller procures the insurance, the seller can presumably be relied on to seek to limit its liabilities and, therefore, its premiums. However, where the risks are insured, the seller may have less of an incentive. Where the buyer is the insured, its insurance will depend on the scope of the warranties and indemnities that it obtains, and it will be in its interests to seek to maximise recoveries. In ‘synthetic’ policies, the insurer covers warranties specified in the policy that are not backed up by representations or warranties of the seller in the SPA. Indeed, in the wake of the covid-19 crisis, commentators observe that the demand for synthetic policies has risen.[15]

What is clear is that insurers are already active in the drafting of the insured’s representations and warranties. W&I insurers bring extensive transaction and claims experience and an interest in clearly defining the insured risks to the drafting process. Clarity in drafting probably helps parties to understand their obligations and decision makers to resolve disputes under the insurance policy and SPA.

Purchase price adjustments

In many SPAs, there is provision for a post-closing or completion purchase price adjustment with, in some instances, an expert accounting determination of the amount of the adjustment to be made (see Chapters 5 and 6). The SPA may address the risk of changes in the financial status of the target between signing and closing by means of warranties (e.g., as to the net working capital) or may provide for a purchase price adjustment mechanism to reflect these changes.

This can create an issue as to the coverage under the W&I policy, which may cover the warranty but not the price adjustment itself. Many insurers exclude coverage of purchase price adjustments. However, if the price adjustment relates to an issue that is also covered by a representation or warranty, the buyer could theoretically proceed through either the price adjustment clause in an expert determination or a claim under the W&I policy. Perhaps to counteract this risk, in insured transactions, purchase price adjustments are usually secured by a separate escrow.[16]

In addition, disputes sometimes arise as to whether the expert accounting determination is properly viewed as final or final subject to manifest error and the effect of that determination on any subsequent arbitration (see Chapter 3). Where the arbitration is between the buyer and the insurer, the argument that the expert determination is not binding may be stronger (assuming that there is no agreement to the contrary in the policy).

This is all a matter for drafting of the SPA and the W&I policy. However, where the boundary between issues subject to expert accounting adjudication and arbitration remains unclear, or expert determinations are called into question, the procedure may be further complicated by the involvement of a W&I insurer.

W&I insurance’s impact on arbitration

In a dispute, one initial issue will be whether the insurer is a party to the arbitration between the buyer and the seller, or whether the buyer may or must proceed first against the insurer under the SPA and the policy.

We understand that a current trend is to limit the buyer’s recourse to the insurer rather than the seller for insured warranties, for example, and to limit the insurer’s rights of subrogation.[17] This arrangement may enable the seller to avoid the time and cost of dispute resolution proceedings, unless there are additional issues relating to uninsured liabilities or issues as to subrogation.

Where the buyer is required to claim under the policy with respect to certain insured warranties and the only subrogation rights retained by the insurer are in cases of fraud, formal dispute resolution proceedings are generally limited to three cases: (1) between the buyer and insured where the buyer contests denial of a claim under the policy or where the parties disagree as to the amount;[18] (2) between the insurer and seller for subrogation of claims arising from the seller’s fraud; or (3) between the buyer and the seller in relation to any uninsured claims.[19]

If the buyer is not required to proceed first against the insurer, a key issue is whether the insurer will participate directly in the arbitration. As discussed below, recent changes to the arbitration rules of the London Court of International Arbitration (LCIA) and the International Chamber of Commerce (ICC) render consolidation or concurrent proceedings possible in certain circumstances. However, if the parties wish to provide for the possibility of the insurers participating in the arbitration itself, it is highly advisable to include consolidation provisions in the arbitration clauses of both the SPA and the W&I policy. The issue is crucial as the wording of the W&I clauses can generally be expected to track liability under the SPA. Therefore, as illustrated in Ageas v. Kwik-Fit & Anor,[20] liability under the SPA may well determine liability under the W&I insurance (subject to any deductible).

As regards M&A insurance arbitrations between insurers and the insureds (usually the buyers and usually in respect of denied claims), there is an issue as to who the parties – or active parties – to the arbitration will be. For example, if there are multiple insurers contributing to various layers of an insurance tower, as discussed above, there is likely to be as many separate policies and corresponding arbitration agreements.[21]

Decisions regarding a common arbitration may be quite difficult if left to the dispute stage, given that the insurers may have differing interests depending on their different attachment points and different approaches to procedural issues. Given the time and cost associated with disputes regarding jurisdiction over additional parties or contracts, parties are well advised to consider and provide for an agreed approach at the contracting stage (see ‘Joinder or consolidation’, below).

All of this may create issues regarding the parties to, and scope of, any M&A insurance arbitration, as is illustrated in the complex situation dealt with in British-American Insurance v. Matelec Sal & Anor,[22] which concerned two arbitrations relating to one insurance policy.

Another option for parties to consider is a mechanism to permit decision-making with respect to the arbitral process at the time of the dispute, which could be modelled on the role of the agent of a financing syndicate in a loan facility. The agent is usually empowered to make minor decisions itself and more material decisions with the consent of the financing parties holding a majority interest in the facility. In many cases with syndicated loans, the financing parties share pro rata in all recovery. Therefore the syndicate lenders’ interests are aligned. However, where the interests of insurers in an insurance tower are not aligned (e.g., when a claim affects only insurers in the lower layers), this model could be unfair. Allowing decisions by a majority of insurers or weighted decision-making might be an option, assuming that the insurers have a say in joint decision-making. However, this approach runs contrary to insurers’ traditional desire to retain as much control as possible over the legal situation.

There are also the classic issues of what the insured may do without the consent of the insurers. In one of the few reported cases in this area, the insured settled without the insurers’ consent. The insured’s claim was dismissed in court proceedings as not falling within the excess coverage but also because the insured did not seek the insurers’ consent as it was required to do under the W&I insurance policy.[23]

How does the involvement of a W&I insurer affect the truth-seeking function of the arbitration process? M&A arbitration between seller and buyer may already involve one step of removal from the most knowledgeable persons, who often are (or were) at the target. When an insurer with little or no previous involvement with the target or the transaction steps into the shoes of the buyer, the insurer is now two steps removed from personal knowledge of the facts and circumstances of the case. In particular, when prosecuting claims of fraud by the seller or claims under warranties with knowledge qualifiers, the insurer may be at an informational disadvantage.[24]

The effects of this on arbitral procedure are not yet known. We may begin to see more requests for judicial assistance in the taking of evidence from tribunals. In any case, when the seller or the buyer is no longer involved, both parties and tribunals will need to expend additional time in finding the facts.

This effect on truth finding may be greater in relation to W&I insurance than insurance of other externalised risks. In the case of liability insurance, for instance, the focus is usually on either certain external factors or the insured’s own behaviour. In the case of W&I insurance, whether a representation was correct as given or whether a warranty is observed is largely within the control of the seller or target. There may be more room for insurance fraud in the M&A context than with typical liability insurance.

When issues regarding the interpretation of the insurance policies or their arbitration clauses arise in an arbitration, it is possible that none of the parties to the arbitration is able to provide evidence of intent or of the matrix of fact relating to the underlying transaction. This is because the policies are frequently arranged by the lead insurer and negotiated with the buyer’s broker. These negotiations may take place simultaneously with the various layers of insurers or sequentially, and these negotiations are typically done in the final days of a transaction.

Joinder or consolidation

When disputes arise that involve a number of insurers, the parties and arbitrators may be faced with thorny issues involving joinder and consolidation. It will often be more cost-effective to have all warranty issues under an SPA and a W&I insurance policy dealt with in one arbitration rather than in separate proceedings.[25] However, there are practical issues that render this difficult to achieve.

Insurance policies in a tower are typically based on a form (usually that of the buyer’s insurance broker). These forms may provide for court proceedings or for arbitration of claims under the policy. Insurers may view these as difficult to modify to reflect the terms of an arbitration agreement in an underlying SPA (or to insist that the arbitration agreement in the SPA be modified). However, this position is more difficult to justify when the SPA expressly provides for the W&I insurance itself (and perhaps may limit the seller’s liability for warranties as a result). Since the seller will focus in detail on limiting its potential liability, an ancillary adaptation of the arbitration clause would appear to be justifiable in many instances.

Nevertheless, even if the policies contain identical arbitration clauses, consolidation of proceedings generally will not be possible under the rules of most arbitral institutions without agreement of all the parties. However, this rule was not absolute under prior arbitration rules[26] and has been altered with the changes to the LCIA and ICC rules in particular.[27] As a result, there is now a path to joinder or consolidation (or holding concurrent proceedings) to resolve the related issues. It remains to be seen whether parties reflect these possibilities in their SPAs and W&I insurance.

If the buyer has procured insurance from more than a single insurer, any dispute may involve a multiparty and multi-contract situation. From the buyer’s perspective, it may make sense to resolve all coverage issues in a single proceeding. However, implementing this in arbitration requires careful drafting ex ante and the insurers may have less interest in common proceedings.

From the perspective of the insured, consolidation can be a key tool in reducing the length and cost of proceedings. If the tower consists of a primary and two excess layers, an insured could face three consecutive proceedings, in part covering similar or identical issues of coverage and quantum.

From the insurers’ perspective, consolidation may not be the preferred option, since insurers compete fiercely with each other. Each insurer may have a different approach to settlement. They are likely to want to be represented by separate legal counsel, and may not be able to agree on an arbitrator.

Insurers in the higher layers may resist consolidation on the basis that they have the right to wait until the insured has exhausted its remedies against insurers in the lower layers. This argument can be based on economics, as each layer of insurance is priced in light of all the relevant risks, including the risk that the insurer will need to defend a claim in arbitration.

From a substantive perspective, the policies may contain different wordings and trigger different coverage issues. When interpreting the policy wording to ascertain the parties’ intentions, recourse may have to be had to the insurance broker and arrangers who negotiated the policies on behalf of the insured and the insurers, who may not be parties to the arbitration.

Most importantly, as mentioned above, the interests of insurers in different layers will rarely be aligned. Insurers in the lower tiers may focus on coverage issues, whereas in the higher tiers they may focus more on quantum issues (whether the attachment point triggering their policy has been reached or whether the claim exhausts the layer). The insurers may have little incentive to work together.

From the arbitrators’ perspective, consolidated proceedings may be more difficult to handle because of the number of parties, counsels, briefs and differing perspectives.

Comparison with dispute resolution in the excess liability market

Although W&I insurance is relatively new on the market, other insurance products may be structured similarly and may provide a useful point of comparison. In terms of dispute resolution procedures, the interests of the insured and the insurers may be comparable with those of the insured and the insurers in relation to W&I insurance. Liability insurance tends to be structured similarly, in a tower with excess layers.

The Bermuda Form policies generally foresee institutional arbitration seated in London or Bermuda.[28] The forms have not yet adopted language foreseeing consolidated proceedings, and consolidation in either London or Bermuda is a matter of consent. For the reasons discussed above, insurers in a tower may have reasons to object to consolidation.[29]

Alternatives to consolidated arbitral proceedings

There are a number of alternative ways to structure arbitral proceedings short of full consolidation.

These include appointing the same tribunal for all consecutive proceedings. The LCIA Arbitration Rules now provide for this possibility in Article 22.7(iii). This has the advantage of being easier to negotiate than full consolidation after the fact and may go a long way towards ensuring that the holdings in the various proceedings are consistent with each other.

As a variation, the parties could also appoint separate tribunals at the same time, with the higher layers agreeing to stay proceedings until the tribunal has issued an award under the primary policy.

Another option would be for the insurers in the higher layers to participate in the primary policy proceeding as observers or interveners. This could be done whether or not the higher layers agree to be bound by the awards. However, the primary policy insurer may not see any advantage in adding potentially controversial voices to its proceeding, in particular as primary insurers cannot know how and to what extent the interventions of the other insurers may complicate or delay the proceedings, potentially adding significant cost to the arbitration. Such an arrangement would at any rate need to include an agreement as to the division of costs among the insurers.

Parties and tribunals may consider procedural protections to ensure that the parties in consolidated proceedings are treated fairly. In particular on the insurers’ side, interests may not be aligned, and care must be taken to ensure that the interests of the insurers are not undermined by contradictory pleading. One way of addressing both the economics and fairness issues is to allow separate briefs to be submitted sequentially, as is frequently provided for in multiparty arbitration. This allows an insurer in a higher layer to wait and see whether the insurers in the lower layers have covered the relevant points and restrict its briefing to isolated points of difference and points specific to the higher layers. Staggering filings may satisfy the expectation of insurers in the higher layers that they will bear a smaller proportion of the cost and burden of proceedings.

Issues involving appointment of the arbitral tribunal

The appointment of arbitrators with the appropriate expertise may pose particular challenges in the case of arbitrations under W&I insurance policies. These disputes are likely to require expertise in insurance law and issues typical in M&A arbitrations, such as transaction experience and financial acuity. Parties will have to consider in any particular case which of these areas of expertise is more important. As the relative importance of these two areas of expertise cannot be foreseen when the policies are entered into, parties should be wary of defining too precisely the qualifications of arbitrators in the arbitration agreement.

The appointment process becomes much more difficult in the case of large towers made up of a number of individual insurers or syndicates, in particular where arbitrators are from firms with insurance practices. Conflicts of interest may be so difficult to handle that the parties have to resort to solo practitioners or academics and, even then, there may be serious issues with parallel arbitrations.[30] However, M&A disputes tend to benefit from the involvement of decision makers who are familiar with M&A transactions.

Issues with document production, confidentiality and legal privilege

Arbitration in the insurance context may trigger special issues in relation to evidence. First, the substantive insurance law governing the policy and the policies themselves grant the insurers broad rights to documents and information when the insured seeks to recover on a claim. In some countries, the law provides that there is no coverage where the insured has failed to provide disclosure of all relevant information.

There have been court decisions in which disclosure of information by the insured to insurers in the claim adjustment phase has been deemed to waive legal privilege in subsequent court proceedings. In Asahi v. Pacific Equity Partners,[31] the insured provided a report containing legal advice to the insurer. In a subsequent action brought by the insured against the private equity seller, Asahi submitted the same report with redactions for legal privilege. The private equity defendant maintained that Asahi had waived privilege by previously submitting the report to the insurer. The Federal Court of Australia held that the insured had waived privilege.

This decision may be of less relevance to typical arbitration claims against a W&I insurer. First, if the dispute involves the insurer directly, there is no question that privilege would have been waived. Normally, the insurance policies will be the primary recourse for the buyer (externalising the seller’s risk having been the primary purpose of entering into the policies in the first place). Second, privilege is handled less formalistically in arbitration than in court litigation. The International Bar Association’s 2020 Rules on the Taking of Evidence in International Arbitration do not require but merely recommend that arbitrators may ‘take into account . . . any possible waiver of any applicable legal impediment or privilege by virtue of consent, earlier disclosure, affirmative use of the Document, statement, oral communication or advice contained therein, or otherwise’.[32] Third, parties in arbitration have considerable freedom to agree to their own procedural rules, and the authors see no reason why the parties cannot set out in their procedural rules specific provisions limiting the disclosure of documents, defining privilege or imposing confidentiality obligations.

Issues with exclusions and damages

W&I policies typically contain a number of exclusions, such as (1) the buyer’s knowledge of breaches at the time of contract (often evidenced in a signed no-claims declaration), (2) disclosure of the relevant facts in the due diligence process, (3) forward-looking statements and (4) fraud or intentional misconduct or misrepresentation by the seller or its agents.

In relation to disclosure of the relevant facts in the due diligence process, whereas SPAs typically define such disclosure as the documents and information disclosed in the data room, many W&I policies include the due diligence reports of the buyer’s counsel and agents in this definition. In addition, the buyer with W&I insurance should ensure that any closing or completion update to disclosure is communicated to and accepted by the insurer.[33] There can be a gap between claims that may lie under the SPA and claims that may lie under the W&I insurance policy.[34]

In relation to fraud or intentional misconduct, as can be seen in Part II of this book, such claims are common in many civil law jurisdictions, in particular because contractual caps or limitation periods are not enforced in relation to them. Such claims will not have a role in M&A insurance arbitrations. It remains to be seen whether W&I insurance will reduce the overall volume of these claims (many of which are held not likely to succeed on the merits), or whether buyers will continue to seek recourse in respect of such claims against the sellers under the SPA.

Insurers are also often hesitant to extend coverage to breaches of representations and warranties terms relating to environmental laws or anti-bribery or corruption laws. When a buyer discovers evidence of breaches of environmental law or corruption in the target after acquisition, it will generally be forced to proceed directly against the seller under the SPA.

As mentioned above, insurers also often exclude coverage of any purchase price adjustment claims.

In terms of covered losses, typical exclusions include consequential damages, lost profits and government authority fines. Sometimes ‘consequential damages’ are specifically defined as including damages based on the application of multipliers to the purchase price. It remains to be seen how decision makers construe exclusions of consequential damages, but these exclusions could have a significant effect on damages awards because multipliers have a significant role in calculating damages in M&A cases, in particular in relation to breaches of representations and warranties clauses relating to the accuracy of the financial statements.

Drafting applicable law and arbitration clauses

Practitioners frequently bemoan that arbitration clauses are added at the last minute without due consideration of their consequences. Whether as a general rule that is true or not, there is little justification for that approach for arbitration clauses where W&I insurance is involved. The purpose of the W&I coverage is to deal with liability that the parties feel may well arise.

As regards the arbitration clause in the SPA, if the insurers wish to have a right to conduct consolidated arbitration proceedings, this should be clearly provided in the clause. In addition, to avoid being drawn in when the insurers may not wish to be involved, the right should (where permissible by law) be asymmetrical: the insurers should have the right to invoke consolidation but not the obligation to conduct disputes under the insurance contracts in the M&A arbitration.

M&A insurance arbitrations are more complex, especially if there are a number of insurers and separate insurance contracts. However, a general consent to consolidation of insurer arbitrations can be effective to limit the cost and duration of the arbitration. An express provision is preferable to relying on institutional rules for consolidation of arbitrations under multiple contracts.

For the reasons discussed above, consolidation of proceedings after a claim has been filed may be difficult in practice, and this difficulty may rise along with the number of insurers involved. Should parties want a single proceeding, this is best considered before the policies are entered into. Insurers and brokers should consider model clauses as a matter of principle as underwriting issues may take precedence.

As an alternative to fully consolidated proceedings, insurers may consider staggered proceedings, where insurers in the higher layers are bound by awards issued in proceedings with the lower layers, potentially in connection with waivers of confidentiality and intervention rights.

Although litigation may offer stronger joinder and consolidation mechanisms than arbitration, parties, and in particular insurers, may nonetheless prefer arbitration, notwithstanding the procedural complexity. This is because insurers generally tend to have less of an interest in consolidation than does the insured. Factors such as confidentiality may be of particular importance to insurers. As seen in Part II of this book, arbitration tends to be the preferred method of dispute resolution for M&A transactions in many jurisdictions, which in turn increases the competence and experience of arbitrators to handle the issues. However, insurers may also consider the likelihood that evidence from seller or target representatives will be needed and the relative ease of summoning such witnesses and evidence in litigation as opposed to arbitration. Finally, the relative advantages and disadvantages of litigation must be considered in light of the jurisdiction in question, as in particular the ability of the courts to require production of documentary evidence tends to be much stronger in common law than in civil law jurisdictions.

The table below summarises considerations with respect to arbitration clauses in the SPA and insurance contracts.

SPA/M&A arbitrationInsurance contracts/M&A insurance arbitrationComments
Governing law of the SPA: usually linked to law of the target or generally used law such as English lawGoverning law of the insurance contract: should be the same as for the SPA and the other insurance contracts so that results are parallelA differing legal standard will cause additional expense and may result in gaps in coverage. See Part II of this Guide for a comparison of substantive laws in relation to key issues
Governing law of the arbitration agreement Many practitioners assume that the governing law of the SPA or insurance contract will apply to the arbitration agreement or agreements. In England and Wales, this is now presumptively but not always the case.[35] In France, arbitration agreements are subject to international principles based on the common intention of the parties. In other countries, the law of the seat may be deemed to apply to the arbitration clause
Consolidation: consider whether to permit asymmetrical consolidation of disputes under the insurance contractsConsolidation: consider whether to permit asymmetrical consolidation of disputes under the insurance contract with disputes under the SPA at the option of the insurer or consolidation of disputes under the insurance contractsIf consolidated proceedings are contemplated, the arbitration clauses should be as close to identical as possible and contain an express statement of consent to future consolidation
Scope of arbitration clause: should be broad enough to cover all disputes arising out of or in connection with the SPA (including tort or quasi-tort) and, if desired, provide for the possibility of covering issues under the insurance contracts in the case of consolidation (at the option of the insurers).

Should be clear as to the status of any expert adjudication of purchase price adjustments

Scope of arbitration clause: should cover all disputes arising out of the insurance contracts and, if desired, provide for the possibility of covering issues under the SPA in the case of consolidation (at the option of the insurer) or the possibility of covering issues under related insurance contractsScope must be linked to joinder or consolidation.

Where insurers are involved, additional rules may be needed regarding the conduct of the proceeding to ensure that the various layers are treated fairly

Arbitration rules: should be checked for conduct of multi-contract arbitrations, joinder, consolidation, concurrent proceedings and as to the policy for appointment of arbitrators, in particular in multiparty situationsArbitration rules: should be the same as in the SPA and the other insurance contracts if consolidation is considered. Where multiple insurers may appoint a common arbitrator, care should be taken to ensure that the mechanism is workableMajor institutional rules and UNCITRAL Rules with a known appointing authority provide similar background. A key issue is the appointing policy to ensure that arbitrators have the appropriate level of relevant experience, in particular because the institution may appoint all arbitrators in multiparty arbitration
Language: should be easily accessible to all potential parties, including the insurersLanguage: should be the same as in the SPA and the other insurance contracts to avoid costs and gaps 
Procedure: in the case of proceedings involving multiple insurers, should provide for sequential submissions of each partyProcedure: in proceedings involving multiple insurers, should provide for sequential submissions of each party 
Place of arbitration: note that this may affect or determine the law applicable to the arbitration clause. Experience and track record of courts with similar cases is key owing to possible annulment proceedings. Language of local courts may be a factorPlace of arbitration: should be the same as in the SPA and the other insurance contracts if consolidation is consideredAs noted above, under English law generally, the governing law of the contract applies to the arbitration agreement. However, if the place of arbitration is England, and there is a serious risk that the arbitration agreement would be ineffective under the governing law of the contract, the law of the place of arbitration may be applicable. The French approach is based on interpreting the arbitration clause by reference to the common intention of the parties without reference to a national legal system[36]
Documentary disclosure: consideration should be made of whether certain categories of documents (such as documents between the insured and the insurers) should be subject to, or specifically excluded from, disclosure if there is no consolidationDocumentary disclosure: in the case of consolidation with the M&A arbitration, disclosure of insured and insurer documents will usually be made. Otherwise, the insured and insurers may wish to limit disclosure in the M&A arbitrationParties should consider the potential relevance of insurance documents in the M&A arbitration, in light of both confidentiality concerns and inconsistent positions.

Consider adding provisions limiting the disclosure of documents, defining privilege or imposing confidentiality obligations.

Settlement and dispositions of W&I insurance disputes

The special aspects of W&I insurance policies also need to be taken into account in disposing of disputes under them. Parties are frequently frustrated by awards that merely split the difference or dispose of disputes generally instead of addressing the details of each claim.

This approach can be not only frustrating but also fundamentally wrong in the case of W&I insurance towers. As discussed above, the contractual structure of the insurance tower is based on the premise that each layer must be addressed successively. Although it may be appropriate for insurers in the same layer to be required to pay a certain percentage of the coverage, it would be unusual, and probably inconsistent with the intention of the tower approach, for insurers from all layers to be required to pay the same percentage of the claim. This is because each layer is intended to stand on its own, triggered only where the quantum has been proven to reach the attachment point.


Arbitration is the most prevalent form of dispute resolution for M&A disputes and is also appropriate for resolution of M&A disputes between insureds and insurers under W&I insurance policies. Arbitral tribunals have more experience in dealing with the specific M&A subject matter and can be selected to include the requisite insurance law expertise. However, when the insurance is structured to include a number of separate insurance contracts, careful thought should be given to structuring the arbitral proceedings. If consolidated proceedings are desired, this should be foreseen in the arbitration clauses to avoid a protracted and expensive jurisdictional battle after arbitration is commenced.


[1] Amy C Kläsener is a partner at Jones Day and Thomas H Webster is an independent arbitrator at the Law Offices of Thomas Webster.

[2] Or in US parlance ‘representation and warranty insurance’ or ‘RWI’.

[3] See, for example, Aftermarket Network Australia Pty Ltd v. Certain underwriters at Lloyd’s subscribing to Policy No 6482/13(C)-13087 [2016] FCA 1402 (Aftermarket) (representations made ‘for the sole purpose of allowing the Purchaser to pursue Subject Claims under the W&I Insurance Policy’) and UDP Holdings Pty Ltd (subject to deed of company arrangement) (rec and mgr apptd) v. Ironshore Corporate Capital (No. 2) (UDP Holdings) (2019) VSC 645 (W&I insurance obtained for the buyer’s benefit at the seller’s cost and the seller relieved of liability for claims covered by the W&I insurance).

[4] Estimates range from approximately 18 to 26 per cent (D Froneberg and D Dreier, ‘AIG Studie 2019: Steigende Azahl der Meldungen und höhere Schäden’, in M&A Insurance, Grundlagen – Praxis – Trends (June 2019), p. 36) to 55 per cent (SRS Acquiom, Claims Insights Report (December 2018), p. 16). AIG states that the claims rate exceeds 20 per cent in all but the smallest deals. See AIG Claims Intelligence Series, ‘M&A: Elevated Claim Levels Put Focus on Due Diligence’ (2021), p. 3, at https://www.aig.com/content/dam/aig/america-canada/us/documents/business/mergers-and-acquisitions/aig-manda-2021-r-and-w.pdf (last accessed 2 December 2022).

[5] See Berkeley Research Group, ‘M&A Disputes Report 2022: Global Economic Headwinds Impact M&A Market and Drive Disputes’ (2022), pp. 5–6, 9–11, 18–20; Mirjam Boche, ‘Impact of the Corona Pandemic on the M&A Insurance Market’, M&A Review (26 July 2020), p. 1.

[6] See SRS Acquiom, 2019 Buy-side Representations and Warranties Insurance (RWI) Deal Terms Study (October 2019).

[7] Except as otherwise indicated, the discussion below focuses on the situation where the buyer is the insured and the seller is the party giving the warranty and indemnity. Although W&I insurance is also offered to sellers, the overwhelming majority of policies are issued to buyers in M&A transactions.

[8] See P Ratz, G Kharif and A Robinson, ‘W&I Insurance for Larger Deals: Practical Considerations for Tower Structures and Claims in Syndicated Insurance Programmes’, M&A Review (June 2022), at pp. 210–11 (observing a trend towards declining policy limits, including as a result of declining premiums).

[9] See, ibid., at p. 211 for strategic considerations in structuring an insurance tower.

[10] J Risse and H Haller, ‘Post M&A Arbitration: Warranty & Indemnity Insurance Changes the Scene’, Baker McKenzie Newsletter (12 January 2017), available at www.globalarbitrationnews.com/post-ma-arbitration-warranty-indemnity-insurance-changes-the-scene/ (last accessed 26 October 2022).

[11] See footnote 3.

[12] For example, in buyer-side policies, insurers typically require access to due diligence reports prepared by the buyer’s counsel or other advisers, which may be confidential and privileged.

[13] For example, although an insurer will in fact rely on an auditor’s report, auditors’ reports will generally exclude reliance by third parties. Whether insurers will request reliance letters, and whether auditors will grant them, are questions that remain open at present.

[14] Risse and Haller (op. cit. note 10).

[15] See M Rasner, T Liebau and G Knorr, ‘Der Einsatz synthetischer W&I-Versicherungslösungen beim Unternehmensverkauf’, M&A Review (June 2022), pp. 214–17; Mirjam Boche, ‘Impact of the Corona Pandemic on the M&A Insurance Market’, M&A Review (26 July 2020), pp. 1–2.

[16] See SRS Acquiom Study (op. cit. note 6), p. 19.

[17] This is illustrated by the Aftermarket and UDP Holdings cases referred to in footnote 3.

[18] In both UDP Holdings and Ageas (UK) Limited v. Kwik-Fit (GB) Limited and AIG Europe Limited [2014] EWHC 2178 (QB) (Ageas), the insurer contested the amount of the claim based on the possibility of further recoveries from the seller.

[19] In UDP Holdings, the buyer first had to bring arbitration proceedings against the seller, in part in defence of a claim for payment of the balance of the purchase price and for certain breaches of the sale and purchase agreement (SPA). The buyer then had to bring court proceedings against the insurer, who denied liability under the claim. Initially, the court case was stayed pending the results of the arbitration. In the court case itself, the parties did not challenge the findings in the arbitration (at para. 133 of the judgment), although the buyer’s argument that the arbitration award resulted in res judicata was rejected. Therefore, relitigation of the basic factual issues in the arbitration was avoided but by agreement only.

[20] In Ageas, the claim under the insurance policy was essentially a pass-through of the warranty claim under the SPA subject to deduction of the minimum. The importance of the drafting of the insurance policy is reflected in the UDP Holdings case, in which the insurer contested liability under the policy although the insurer accepted that the seller had breached the relevant SPA.

[21] Insurers generally enter into separate policies with the insured, although in some cases groups of insurers may enter into a single policy (e.g., as open co-insurers) with the insured that provides for several (not joint) liability (see, for example, Article 77 of Germany’s Federal Insurance Contract Law). The difficulties are illustrated by the Lixil arbitration against AIG, which is subject to pending annulment proceedings in the German courts. Lixil had insurance coverage with 20 insurers led by AIG. Initially, apparently, the insurers insisted that Lixil would have to bring 15 arbitrations against the insurers. Eventually it was agreed that Lixil would bring proceedings against AIG and then – layer by layer – against three other groups of insurers. Therefore, the situation resulted in a series of potential arbitrations. See ‘German court hears challenge to M&A insurance award’, Global Arbitration Review (28 October 2020).

[22] British-American Insurance (Kenya) Ltd. v. Matelec Sal and Thika Power Ltd. [2013] EWHC 3278 (Comm). The parties in this case appear to have incurred substantial costs to determine whether arbitration provisions were applicable before even beginning to deal with the underlying issues.

[23] See H Epstein and T Keyes, ‘Court Denies Coverage under Reps and Warranties Policy’, New York Law Journal, Vol. 258, No. 101 (24 November 2017). Ratajczak et al v. Beazley Solutions Ltd. 2016 WL 8117956 (ED Wisconsin 2016), and 870 F. 3d 650 (7th Cir. 2017).

[24] Insurers typically gain access to all information and documentation in possession of the buyer/insured, but claims of fraud often rely on evidence that is with the seller. To the extent that liability for fraud is not excluded under the policy, insurers would be well advised to ensure that the dispute resolution provision under the SPA provides for access for the insurers to relevant documents, which is something that may not be available in the case of litigation in many civil law countries. Notably, the trend towards ‘knowledge scrapes’ serves to mitigate the factual complexity of knowledge qualifiers. A knowledge scrape is effectively the exclusion of knowledge qualifiers from the policy (even if they are included in the SPA). This limits the fact-finding mission to whether or not the representation or warranty was objectively true at the relevant point in time, without reference to anyone’s subjective knowledge, resulting in broader coverage under the policy than the SPA. See Rasner, Liebau and Knorr (op. cit. note 15), at p. 216.

[25] For an illustration of the difficulties with having separate proceedings, see UDP Holdings and, in particular, the summary of correspondence between counsel for the insured and for the insurers, beginning at Appendix 1, pp. 77–86. In this case, the insured’s claim for its arbitration costs was dismissed.

[26] For an exception, see the 2014 Rules of the London Court of International Arbitration (LCIA) at Article 22.1(viii). The corresponding provision of the 1998 LCIA Rules was discussed in C v. D1, D2 and D3 [2015] EWHC 2126 (Comm), upholding the joinder of a party to the arbitration. (One of the authors was presiding arbitrator.)

[27] The LCIA Rules were amended, effective from 1 October 2020, to provide, in particular in Article 1, for a composite request for arbitration and to provide in Article 22A (at para. 22.7) that an arbitral tribunal may decide: ‘(ii) the consolidation of the arbitration with one or more other arbitrations subject to the LCIA Rules and commenced under the same arbitration agreement or any compatible arbitration agreement(s) and either between the same disputing parties or arising out of the same transaction or series of related transactions, provided that no arbitral tribunal has yet been formed by the LCIA Court for such other arbitration(s) or, if already formed, that such arbitral tribunal(s) is(are) composed of the same arbitrators.’

The International Chamber of Commerce Rules provide for joinder of parties in Article 7. From 1 January 2021, an arbitral tribunal is permitted to join a party despite another party’s objection if the additional party (1) accepts the constitution of the arbitral tribunal and (2) agrees to the terms of reference where applicable. Rules 7 and 8 of the arbitration rules of the Singapore International Arbitration Centre also provide for joinder and consolidation.

[28] See D Scorey, R Geddes and C Harris, The Bermuda Form: Interpretation and Dispute Resolution of Excess Liability Insurance (Oxford University Press).

[29] For a discussion, see M Matin, ‘The Bermuda Form Arbitration Process: A Glimpse Through the Insurers’ Spectacles’ (Norton Rose Fulbright), p. 8, available at www.nortonrosefulbright.com/-/media/files/nrf/nrfweb/imported/20171107--the-bermuda-form-arbitration-process-a-glimpse-through-the-insurers-spectacles.pdf?la=en&revision=30e91ed8-cfc1-40e1-9696-66af3cf0bf26 (last accessed 26 October 2022).

[30] For an example of issues arising in a (non-disclosed) parallel case in an insurance context, see Halliburton Company v. Chubb Bermuda Insurance Ltd. [2018] EWCA Civ 817.

[31] Asahi Holdings (Australia) Pty. Ltd. v. Pacific Equity Partners Pty. Ltd. (No. 2), 2014, FCA 481; see Andrew Sharpe, ‘Asahi sends cold shivers down insurers’ spines’, McCabes Lawyers Pty Ltd (8 September 2014), available at www.mccabes.com.au/wp-content/uploads/2016/01/Asahi-sends-cold-shiver-down-insurers_-spines1.pdf (last accessed 26 October 2022).

[32] International Bar Association, Rules on the Taking of Evidence in International Arbitration (2020), Article 9.4(d).

[33] In fact, if W&I insurance is a basic part of an acquisition, one of the closing conditions in the SPA should generally be that the insurer not raise any objection to the seller’s closing date disclosure.

[34] I Varachia and A Berberich, ‘What’s next in M&A Insurance?’, in M&A Insurance, Grundlagen – Praxis – Trends (May 2018), p. 29.

[35] See Enka Insaat Ve Sanayi AS v. OOO Insurance Company Chubb [2020] UKSC 38. The choice of governing law for a contract will generally apply to an arbitration agreement forming a part of it. The choice of a different country as the place of arbitration does not, without more, negate that inference.

[36] For a summary, see T Webster, Handbook of UNCITRAL Arbitration (Sweet & Maxwell, 3rd edition, 2019), from paragraph 1-13.

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