Why Do R&W Insurance Claims Fail? – Lessons from the US and the UK

[By Aditi Mishra]

The author is a student of NMIMS School of Law, Mumbai.



During M&A transactions, it is common for the seller to make representations and warranties to the buyer on several aspects pertaining to the target company such as material contracts, financial statements, tax information, intellectual property, etc. A representation is a statement of fact relating to the past or the present state of business of the Target company. The seller makes these representations to induce the buyer to enter into an agreement. For example, a seller might represent that all licenses required to operate the business were obtained lawfully and are valid as on date. A warranty, on the other hand, is a statement or a promise of a condition concerning the Target company relating to the present or the future. Hence, a promise that the necessary licenses will not be cancelled in the future is a warranty.

In recent years, representations and warranties (“R&W”) insurance has gained much traction in the M&A segment. This is because it helps mitigate some of the risks that come with acquiring a new asset or business. An R&W insurance policy can be buy-side or sell-side. From the seller’s perspective, R&W insurance provides a cushion against any damages that the seller might have to pay to the buyer upon breach. From the buyer’s perspective, R&W insurance helps reduce any concerns that the buyer might have regarding the seller’s credibility.

AIG’s 2021 International Claims Intelligence Report provides interesting insights into the current claims in this space.[i] The AIG Report finds elevated levels of claims, in terms of both severity and number. One in every five policies are invoked, with the average claims size being as high as $19 million. As the R&W claims increase, the claims process becomes more complex, notes Lowenstein Sandler’s 2023 R&W Insurance Claims Report. [ii]

In this background, the article discerns common issues faced by the policyholders during the R&W claims process, regarding recent case law developments in the US and the UK.

Key R&W Insurance Claims Issues

I. Establishing Breach of Warranty

The first requisite to claim under an R&W policy is to establish the breach of a warranty. The onus to establish breach is on the policyholder and it is observed that they are sometimes unable to discharge this burden. Common hurdles faced in establishing a breach are issues with the construction of the warranty and the timing of the breach.

Construction of Warranty

If the breach complained of does not fall within the ambit of the warranty as properly construed, there will be no payout. Mc Dermott et al. note that for a successful claim, the seller’s warranties must align with the buyer’s objectives, and the relevant R&W policy should apply in case of breach of warranties.[iii]

To illustrate this point – in the case of Finsbury Food Group Plc v Axis Corporate Capital UK Ltd [2023] EWHC 1559 (Comm)[iv] (“Finsbury case”), Finsbury claimed that a recipe change by the Seller, Ultrapharm (a bakery business), had breached the Trading Conditions Warranty contained in the Share Purchase Agreement. The Court noted that upon a true construction of the Trading Conditions Warranty, to qualify as a breach, the recipe change must constitute a “material adverse change” in the trading position of Ultrapharm. It was found that the recipe change was not a material adverse change as it was a part of the ordinary course of a bakery’s business.

Further, currently in Novolex Holdings LLC (ongoing matter), the success of Novolex’s claim hinges on whether purchase orders constitute a “contract” under Delaware law, to amount to a breach of the Material Contracts Warranty under which the seller had warranted that no material customer had indicated it intended to terminate or modify an existing “contract”. [v]

Timing of Breach

The insurer will only accept the claim when the breach takes place pre-closing i.e., before the transaction is concluded.  In the Finsbury case, Finsbury alleged that price reductions offered by Ultrapharm to its chief customer, Marks & Spencer, breached the Price Reductions Warranty.  The Court found that there was no breach because the Warranty only covered price reductions since the Accounts Date, and the price reductions were offered to Marks & Spencer before that Date. The Court noted that the Warranty only intended to cover breaches between the period of the Accounts Date and the conclusion of the SPA.

II. Coverage of R&W Policy – Knowledge Exclusion

The coverage of the R&W policy has two aspects attached to it: first, the breach must be a covered breach under the R&W policy; and second, the loss must exceed the retention limits under the policy.

Knowledge Exclusion

R&W policies often exclude payout for breaches that the policyholder knew about before closing. The onus to prove an exclusion under the policy is on the insurer – and it is generally a high one, however, in the Finsbury case, “actual knowledge” was held to also include Nelsonian knowledge or wilful blindness. The case illustrates the importance of evidence and the role transaction leaders play in conducting due diligence. The Court rejected most of the claimant-policyholder’s evidence and observed that it was enough that the relevant persons at Finsbury had all the facts available to them, they did not need to be told that “2 + 2 equaled 4”.

Retention Limits

R&W policies prescribe certain self-insured retention limits i.e., the amount that the policyholder shall pay out of their pocket, before the policy starts paying out on a claim. For example, if the policyholder makes a claim of $15 million and the R&W policy stipulates a retention limit of $5 million – the policyholder will only be entitled to the portion of the claim falling outside the self-insured retention limit, which will be $10 million. As per Lowenstein Sandler’s 2023 R&W Insurance Claims Report, 61% of respondents reported claims that were entirely within the self-insured retention limit. [vi] In Ratajczak v. Beazley Solutions Ltd., 870 F.3d 650 (7th Cir. 2017), one of the reasons behind Ratajczak’s failed claim was that the contractual damages for the breach complained of were capped at $1.5 million – which was also the self-insured retention under the policy. [vii]

III. Proving Loss

Once the breach of warranty is established and the breach is a covered breach under the policy, the next challenge for policyholders is to prove loss. In the Finsbury case, the seller, Ultrapharm, was only willing to sell at a fixed price of £20 million. The Court found that Finsbury would have paid the full purchase price for Ultrapharm regardless. Thus, there was no loss caused to Finsbury and the actual value of the Target company was inconsequential.

IV. Assessment of Damages Based on a Contingency

It is accepted that loss on account of breach of representations and warranties is to be calculated as the difference between “as warranted value” and “actual value” of the Target company. Generally, the purchase price is considered the “as warranted” value of the Target company. Hence, to calculate loss, the “actual value” of the Target company is to be determined at the date of acquisition.

This determination of the “actual value” of the Target company involves making some assumptions regarding the future incidence of the contingent liabilities of the Target company. However, it may happen that by the time the damages are due to be assessed, the contingent liabilities have arisen and their actual incidence is known. The question which arises next is, whether such subsequent events are to be considered when determining the “actual value” of the Target company. The UK Court dealt with this precise question in Ageas (UK) Ltd v Kwik-Fit (GB) Ltd & Anor [2014] EWHC 2178 (QB)[viii].

The UK Court explained that the general rule is that damages are to be assessed at the date of breach. A departure from the general rule may be permissible in two situations – 1) when not considering subsequent events will lead to overcompensation or windfall to the policyholder; and 2) in case of contractual allocation of risks.[ix]

In this case, the Target company was overvalued due to underestimation of a contingent liability item called Time on Cover Bad Debt (TOCBD). After the sale, the incidence of TOCBD was much lower. Accordingly, the insurer sought to take the lower value into account when determining the “actual value” of the Target company to ascertain loss. However, the insurer failed to prove that not considering the subsequent incidence of TOCBD will lead to overcompensation to the policyholder. Further, the bargain embodied in the SPA allocated the risk to the policyholder/buyer of any benefit or loss arising either as a result of the way the buyer chose to run the business or as a result of external influences on the success of the business. The Court found that a lower incidence of TOCBD was attributable to the buyer’s business prowess – and thus, the buyer could not be deprived of that benefit by considering subsequent events to value Target company as on acquisition.


It is unusual for R&W claims to reach the completion stage in Court as such disputes are often either privately arbitrated or settled before a final judgement is pronounced. Nonetheless, the analysis from the case laws set out above provides insights into the difficulties faced by policyholders in the R&W insurance claims process. Lowenstein Sandler’s Report also finds a worrying trend of the insurance claims process becoming increasingly adversarial in nature.[x] It is reported that insurers most commonly challenge loss valuation, lack of breach and knowledge exclusions to deny claims. In this background, key emerging themes for policyholders are the alignment of representations and warranties made in the sale and purchase agreement and the R&W policy, the importance of due diligence to defend knowledge exclusion claims by the insurer and the contractual allocation of risk.


[i] AIG, M&A: Elevated claim levels put focus on due diligence, (2021).

[ii] Lowenstein Sandler, Are Buyers Still Getting Paid? The Evolution of R&W Insurance Claims, (2023).

[iii] Patrick M. McDermott et al., Representations and Warranties Insurance: Fundamentals.

[iv] Finsbury Food Group Plc v Axis Corporate Capital UK Ltd [2023] EWHC 1559 (Comm).

[v] Patrick M. McDermott et al., supra note iii.

[vi] Lowenstein Sandler, supra note ii.

[vii] Ratajczak v. Beazley Solutions Ltd., 870 F.3d 650 (7th Cir. 2017).

[viii] Ageas (UK) Ltd v Kwik-Fit (GB) Ltd & Anor [2014] EWHC 2178 (QB).

[ix] Id.

[x] Lowenstein Sandler, supra note ii.


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