Buying Rep & Warranty Insurance? Be Sure to Watch Your Language!

Lisa Campisi

campisiNumerous commentators have written as to how Representations and Warranty Insurance (“Rep & Warranty Insurance”) can be a valuable tool in getting deals closed. Indeed, numerous difficult deals that may have otherwise died, or at least gone sideways, have been able to close thanks to the prudent use of Rep & Warranty Insurance.

As noted at a recent Blank Rome CLE presentation to several hundred in-house and outside counsel, like any other insurance policy the quality of a Rep & Warranty Insurance policy will depend on essentially one thing: the policy language. Accordingly, this post does not focus on whether or how to obtain such insurance, but on some of the key terms to analyze and seek to negotiate or enhance if you do.

The good news is that much of the language in Rep & Warranty Insurance policies can be negotiated, sometimes even more so than with respect to other insurance policy forms. Before paying the premium and binding coverage, the intended insured (which is often, but not always, the buyer) would be well-served to have experienced insurance counsel review the policy language and, where possible, revise it to be as favorable as possible. Outlined below are certain key terms in such policies of which clients and counsel should be aware and seek enhancement:

  • Definition of Breach: Rep & Warranty Insurance essentially covers losses resulting from breaches of reps and warranties in the relevant purchase agreement. Because the trigger of coverage is a “Breach,” that definition should be as broad as possible.
  • Definition of Loss: Like the definition of Breach, the definition of Loss should be as broad as possible, given that the policy’s key promise is to pay “Loss” on account of a “Breach.” Thus, carve outs from the Loss definition should be closely scrutinized.
  • Actual Knowledge Definition: A key limitation to the coverage available under a Rep & Warranty Insurance policy is that it will not cover losses resulting from breaches of reps and warranties to the extent that the insured had knowledge of the Breach when the Policy Period incepts. Counsel can and should seek to have the knowledge/actual knowledge definition be as narrow and specific as possible.
  • Exclusions: While Rep & Warranty Insurance policies will likely contain certain “standard” exclusions, and at times certain additional “deal specific” exclusions, the wording of such exclusions varies. The more broadly worded the exclusion, the more potential for the insurer to apply that exclusion to bar coverage not only to what it is apparently intended to bar, but to other losses that are at most tangentially related to the purportedly excluded matters.
  • Choice of Law: The law applicable to the interpretation of insurance contracts is not uniform, and varies greatly across the 50 states on numerous issues. And, unlike many other insurance policies which do not specify which state’s law will apply to the interpretation of the policy in the event of a dispute, Rep & Warranty Insurance policies frequently include a choice of law provision. Specifying the law most favorable to coverage in the body of the policy is critical.
  • Claims handling provisions: Coverage for a covered claim may be forfeited if there is non-compliance with any one of the numerous policy conditions relating to claims handling. For example, such conditions may require notice to be given in a specified and relatively short period of time (e.g., within 30 days of the insured becoming aware of the breach, or even circumstances that could give rise to a breach). Because non-compliance with such provisions may limit or void coverage, care should be taken by counsel to remove or revise the language to make them less onerous. Likewise, counsel should also look to include language (to the extent not already present in the policy form) requiring the insurer to timely respond to a claim for coverage.
  • Dispute Resolution provisions: Like many financial lines-type insurance products, Rep & Warranty Insurance policies typically contain provisions governing when and how disputes with the insurer will be handled. For example, numerous Rep & Warranty Insurance policies contain mandatory arbitration and/or mediation provisions, along with jurisdictional and venue provisions. While the hope of every insured is that such provisions never become relevant, an insured purchasing this coverage should ensure that such provisions are as favorable as possible.

Rep & Warranty Insurance policies should not be viewed as an “off the shelf” product. Instead, they can and should be greatly improved with the assistance of coverage counsel experienced not only in deal-related but insurance-related issues.

Insurance Liability, Risks, and Options in Augmented Reality: Catch ‘Em All

Kevin Doherty, Kevin Bruno and James S. Carter

Kevin R. Doherty Kevin J. Bruno Carter, James S.The rising Pokémon Go sensation has dramatically increased the popularity of augmented reality games, but it has also brought with it increased risks and liabilities for both game users and developers alike. For those who don’t know, Pokémon Go is a mobile app that, although released just last month, has already been downloaded over 75 million times, generated more than $75 million in revenue, and boasts daily usage statistics that have exceeded Snapchat, Twitter, Instagram, and Facebook. It’s a location-based augmented reality game that allows users to partake in virtual scavenger hunts. Using the user’s GPS and mobile camera, players are encouraged to explore their surroundings, seek out animated characters in real world places, and “catch ‘em all.” The characters are overlaid on the player’s screen and displayed as if they exist in reality. Unfortunately, distracted players on the hunt can end up wandering (or driving) into places they shouldn’t be, and becoming injured or injuring others as a result.

The number of Pokémon Go calamities increases daily, with incidents ranging from the mundane to the absurd and dangerous. In the few short weeks since its debut, users have experienced or caused numerous personal injuries, property damage, and car accidents. Some users have become stuck in trees and locked in cemeteries, while more serious incidents involve users straying onto train tracks, falling off cliffs, or entering restricted nuclear power facilities—all while on the hunt for Pokémon characters. Still others in pursuit of Pokémon have trespassed on private property, and some users have even been robbed after being targeted and led to specific locations using the app.

The question that lies ahead is whether and to what extent insurance coverage may be available to respond to the unfortunate and escalating losses we see from this augmented reality product, and others that are sure to follow. For those who use the app, or have been injured by those using it, several types of policies generally provide personal liability coverage, including your standard homeowner’s insurance or renter’s insurance policy, your auto insurance policy, and your uninsured motorist coverage (which in many states is mandatory). But coverage isn’t just for the app user.

Aspiring app developers and companies that develop, manufacture, market, and distribute augmented reality apps or provide augmented reality services should not underestimate the value of appropriate insurance coverage. New companies focused on bringing their product to market in a competitive environment often overlook the value of insurance, in particular relatively new insurance products such as cybersecurity policies. Such coverages are particularly important when considering the fact that pop-up disclaimers and end-user license agreements that are common among mobile app developers don’t always provide adequate protection, and don’t necessarily apply to those injured by game players. In fact, a lawsuit has already been filed in Florida challenging the terms of Niantic’s license agreement (the company that developed Pokémon Go). And even if a licensing agreement is upheld in court, an augmented reality company may incur substantial costs defending itself.

It is therefore important for these types of game developers and companies to have sufficient liability coverage, which might be available through commercial general liability policies and errors and omissions policies; however, the unique nature of many of these claims and corresponding losses might not fit squarely into the types of insurance policies we would typically turn to in these situations. Such policies should contain broad language that clearly cover bodily injury and property damage related to, among other things, the risks associated with augmented reality.

Companies that introduce augmented reality apps would also be wise to obtain additional coverage for cybersecurity due to the potential of such apps to collect vast troves of personal data and the prevalence of data breaches today. See Blank Rome IP attorney Gabriella E. Ziccarelli’s article, The Price of Pokémon Go. As with most cases, whether coverage ultimately exists depends on the facts of the situation and the terms of your policy, so pay close attention and seek the assistance of qualified advisors when purchasing coverage to evaluate the risks, and help avoid potential gaps in coverage for augmented reality risks.

Whether Pokémon Go becomes a long-term success for Nintendo Co. remains to be seen. Nintendo stock soared earlier last month, only to plummet last week after realizations came to light that it didn’t actually develop or publish the game (Niantic, Inc. did; Nintendo only has a percentage interest in the company that markets and licenses the Pokémon franchise to outside developers). Nevertheless, the game’s status is at an all-time high and augmented reality games are likely to become more prevalent, thus increasing the need for sufficient coverage. As augmented reality continues to rise in popularity, it will becoming increasingly important for policyholders to know what insurance options are available to them, and developers of augmented reality products must be mindful of ensuring their business is adequately insured and protected.

Although it’s too soon to know whether carriers will start to offer new coverages and/or apply exclusions specific to augmented reality, at least some specialty insurance options have already popped up. One company claims to offer “Pokedex Insurance” (which is limited to the cost of one’s phone), while a Russian bank just announced that it will provide “free insurance” to its customers who play the game (up to $800). Whether or not these are mere marketing ploys looking to capitalize on the Pokémon frenzy remains to be seen. In any event, savvy policyholders, insurers, and brokers will no doubt have their eye on the augmented reality space as it continues to grow in popularity.

Ensure You Are Covered as Food Companies Face Recall Risks

Justin F. Lavella


A wide number of companies have been in the news in recent months as a result of food contamination or food recall events. However, such problems are not isolated to companies with poor safety records or lackadaisical quality controls. In fact, a report issued by Swiss Re, the international reinsurer, has found that the number of United States food recalls—and the costs associated with those recalls—have nearly doubled since 2002. And this is a trend that is likely to continue as the food industry becomes increasingly integrated, the regulatory requirements become increasingly complex, and infectious diseases become increasingly drug resistant. Accordingly, all companies involved in either the food or health supplement industry must plan not for “if,” but “when” a recall is necessary.

To this end, insurance should be a key component of every company’s risk management strategy, and there are a number of specific insurance products on the market to assist. For example, a number of insurers have started marketing policies to “food and beverage” companies that purport to provide coverage for “accidental contamination” and/or “recall.” Unfortunately, these products have only recently been tested in the courts, and policyholders have been generally disappointed to learn that these policies do not provide the breadth of coverage expected. Continue reading “Ensure You Are Covered as Food Companies Face Recall Risks”

Wage-and-Hour Policies May Be a Useful Asset to Fill Potential Coverage Gaps

Jared Zola and Frank Kaplan

Zola, Jared Kaplan, Frank M.As a wise person once said, “It’s déjà vu all over again.” Anyone who thought wage-and-hour lawsuits would be a short-lived lawsuit du jour of the plaintiffs’ bar have been proven wrong. Claimants filed more than 8,900 FLSA cases in federal court last year, a 30 percent increase from 2011. In light of the continued trend and recent legislation that has the potential to expand liability to individuals acting on an employer’s behalf, employers should take a hard look at the insurance assets available to protect against these potential liabilities.

California’s new statute, the Fair Day’s Pay Act, has the potential to implicate a “person acting on behalf of an employer” to liability for the company’s allegedly improper wage-and-hour practices. Labor Code § 558.1 (eff. Jan. 1, 2016). New York amended its existing Business Corporation Law § 630, effective January 19, 2016, to extend potential liability for unpaid wages to the top 10 shareholders of privately held corporations incorporated in New York and foreign corporations. While employers and individuals are armed with a wide array of defenses, the potential risks warrant a close look at what insurance assets a company has available to offset any potential liabilities in this continuously growing area. Continue reading “Wage-and-Hour Policies May Be a Useful Asset to Fill Potential Coverage Gaps”

The Insured v. Insured Exclusion and Section 1123: the Primacy of Bankruptcy Law and the Importance of Planning Ahead

Justin F. Lavella and Kyle P. Brinkman

lavellaBrinkman, Kyle P.The Insured v. Insured (“IVI”) exclusion is a frequent and important issue for directors & officers (“D&O”) liability coverage, particularly where the bankruptcy of an insured entity may blur the lines of who is an insured and who is acting on behalf of an insured. Nevertheless, because the exclusion generally bars coverage for a claim made against an insured individual that is “brought or maintained by or on behalf of” the insured entity, whether the IVI exclusion applies is often the single most important coverage issue for the many claims often asserted against a debtor’s former directors and officers in bankruptcy.

Although the applicability of the IVI exclusion to bankruptcy-related claims has been litigated several times and often decided in favor of insurers, none of those cases has addressed the critical question of the primacy of Bankruptcy Code Section 1123, and how this provision may prevent application of the exclusion in such circumstances. Therefore, as insurers become more emboldened by their prior victories, debtors, their former directors and officers, as well as their bankruptcy and coverage counsel should be careful to consider Section 1123 both when drafting the debtor’s plan of reorganization and in any subsequent insurance coverage litigation. Continue reading “The Insured v. Insured Exclusion and Section 1123: the Primacy of Bankruptcy Law and the Importance of Planning Ahead”

What’s All This I Hear About Captives?

Ann Blair Laupheimer

Laupheimer, Ann BlairIn our experience, a lawyer specializing in insurance coverage—even a whole group of insurance coverage lawyers—can practice for decades hearing the word “captive” thrown about by brokers or risk managers in large companies without being asked to address legal issues relating to a captive and without understanding what the heck a captive is or how it works. The National Association of Insurance Commissioners (“NAIC”) and the Center for Insurance Policy Research define a captive as “an insurance company created and wholly owned by one or more non-insurance companies to insure the risks of its owner (or owners).”[1] So at its core, a “pure” captive is a quasi-insurance company set up and funded by a business to serve as a form of self-insurance. Continue reading “What’s All This I Hear About Captives?”

“Private” Claims Resolution Programs – Some Keys to Success

Fredric M. Brooks and Deborah Greenspan

Brooks, Fredric M.Greenspan, DeborahIn recent years, we have seen an increasing use of a claims resolution (non-litigation) program offered as an efficient way to resolve large numbers of claims by companies faced with potentially vast and costly lawsuits. Examples include the voluntary program set up by General Motors to resolve injury and death claims related to alleged ignition switch defects in over two million cars; the $4.85 billion program set up to resolve certain Vioxx claims against Merck & Co. in the federal multidistrict litigation (“MDL”); the multi-billion dollar fund set up by BP to address claims arising from the 2010 Gulf oil spill; and the current proposal by Volkswagen to set up a claims program to resolve claims arising out of misleading emissions measures in half a million cars sold in the United States. Continue reading ““Private” Claims Resolution Programs – Some Keys to Success”