W&I: an Obvious Buy for a Buyer, as affirmed by Finsbury Foods
Daniel Shapiro KC explains why the Commercial Court decisions in Finsbury Foods and Project Angel are consistent with, as opposed to contrary to, expectations of properly functioning W&I policies.
A W&I (Warranty & Indemnity) insurance policy is an obvious purchase for most buyers in an M&A transaction. As a result the W&I market is thriving. It was therefore a surprise when, at a claims briefing in February 2024 given by a leading W&I insurer, an insurance broker suggested that the recent Commercial Court decisions in Finsbury Foods Plc v Axis Corporate Capital Ltd & Ors [2023] EWHC 1559 (Comm) and Project Angel Bidco v Various Lloyd’s Syndicates [2023] EWHC 2649 had made W&I a harder sell. Those decisions, to the contrary, should encourage the purchase of W&I.
The benefits of W&I insurance do not normally require stating. Most obviously, W&I insurance allows the buyer to recover promptly from W&I insurers in the event of a breach of warranty by the seller, without engaging in contested litigation against the sellers, and avoiding creating difficulties with any directors or managers still in post from the time the target was owned by the sellers. The extent of the payment of claims and the monetary value to insureds of such indemnities, was apparent from the figures given by the leading W&I insurer at the claims briefing.
Clearly, the broker in question considered Finsbury Foods and Project Angel somehow displaced the benefits of W&I. While in both decisions W&I insurers succeeded and the insured’s claims were dismissed, that does not, of itself, inform one of anything other than that the Commercial Court agreed with W&I insurers that the insured was not entitled to indemnity under the relevant W&I policies. One would have to look at both decisions and ask whether – if a W&I policy is to have value – indemnity should nevertheless have been provided to the insured.
Insurers in Finsbury Foods squarely put their case on the basis that Finsbury’s claim was contrived and false. Insurers alleged, and it was found by the Court that there was no breach of warranty in the SPA, that Finsbury had known of the matters about which it complained prior to its purchase of the target, and Finsbury paid the agreed purchase price because that was the value of the target to Finsbury. Finsbury failed to give disclosure of thousands of documents, many of which were adverse, and put forward witness evidence which was unsatisfactory and rejected as unreliable, much of it on the basis that it was unreal and/or false. The consequence was that the claim was dismissed and Finsbury paid Insurers’ costs on the indemnity basis.
As there was no breach of warranty it should not be surprising that the W&I Policy did not indemnify Finsbury. Even leaving aside the absence of any breach of warranty, Finsbury put forward a contrived, false claim. No insurance policy indemnifies a contrived false claim. Suggesting that because Finsbury was not indemnified then W&I policies are of no value is no more coherent than suggesting a property insurance policy is of no value because it will not indemnify arsonists. The Court rejected the claim because Finsbury was plainly not entitled to indemnity and, further, W&I insurers were right to refuse that indemnity. If they started paying false claims then the premiums for W&I insurance would rise unnecessarily.
In Project Angel an Anti-Bribery and Anti-Corruption (“ABC”) Exclusion had been agreed between the insured and the W&I insurers at the time the W&I policy was placed precisely because there were concerns about the target’s compliance with anti-bribery legislation. Having agreed the ABC Exclusion (and, presumably, accordingly paid a lower premium), the insured tried to re-write the ABC Exclusion, claiming there was an “obvious minor error” in drafting where the word “or” should have been written “for”. This “obvious minor error” would essentially render the ABC Exclusion ineffectual. In particular, there would be no effective exclusion for the concerns about the target’s compliance with anti-bribery legislation in respect of which the ABC Exclusion had been agreed. Unsurprisingly, the Court refused to re-write the Policy.
Again, the decision in Project Angel is to be expected. Both insurers and insureds should be free to delineate the risk, including by appropriate exclusions, and then accordingly, to agree, pay and receive a premium based on that delineated risk. The insured in Project Angel effectively sought to claim precisely in circumstances it had agreed it would have no claim at the time of placement. The decision is consistent with facilitating insurers and insureds to delineate the risk.
Neither of the foregoing decisions undermines the benefits of W&I insurance. To the contrary, Finsbury illustrates insurers properly rejecting a contrived claim (which keeps W&I premiums down) while Angel illustrates insurers properly enforcing the limits of the coverage which were agreed (which assists the placement of W&I policies). Both are consistent with, as opposed to contrary to, expectations of properly functioning W&I policies.
Significantly, what one does not see are reported decisions favourable to insureds where W&I insurers have wrongly refused claims. The absence of reported decisions favourable to insureds illustrates that W&I are not rejecting claims wrongly or unreasonably. That insurers are paying substantial sums in respect of those claims properly made is illustrated by the figures given by the leading W&I insurer.
Of course, there are decisions in arbitration which are not reported, but the short point is that Finsbury Foods and Project Angel do nothing to contradict the essential benefits of W&I insurance.
Daniel Shapiro KC acted for Axis & Others in Finsbury Foods Plc v Axis Corporate Capital Ltd & Ors [2023] EWHC 1559 (Comm), leading Caroline McColgan and Hamish Fraser. Daniel was instructed by Kirsty Hick, Rebecca Bailey, Julian Bubb-Humfryes, and James Woodward at DAC Beachcroft LLP.
