Lisa M. Campisi
Numerous 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.