Across Australia and New Zealand, insurance claims concerning mergers and acquisitions (M&A) deals are continuing to rise and are much higher than claims in other insurance lines. Aon’s latest data shows that one in five firms with warranty and indemnity (W&I) insurance who are involved in these deals are making claims. The lessons for insurance brokers, say industry experts, include the need to focus more closely on clients’ due diligence obligations and to be ready to handle rising numbers of W&I claims.
Anita Vivekananda (pictured) said as the M&A insurance market matures, brokers are encountering increasingly complex and high-value claims.
“To address this, brokers can invest in specialised training for their teams to enhance technical expertise and improve claims handling processes,” said Vivekananda, who is Aon’s head of transaction solutions, Pacific.
Another deal challenge that brokers should watch out for, she said, is loss quantification disputes.
“Disagreements over loss quantification are common, with insured parties advocating for broader interpretations while insurers scrutinise causation and damages,” said Vivekananda. “Brokers can facilitate better communication between parties and encourage the use of independent experts to provide objective assessments.”
One of the drivers of these increasing M&A claims numbers, according to the report, is inadequate disclosure during due diligence. “Brokers can work closely with clients to ensure comprehensive due diligence processes and encourage transparency in disclosures to minimise the risk of claims,” said Vivekananda.
Regulatory compliance challenges, she said, have made employment related W&I claims “particularly challenging.” “Brokers can assist clients by providing guidance on compliance requirements and advocating for thorough due diligence in employment matters,” she said.
The current M&A market across the region, according to reports, is increasingly competitive. Vivekananda said the influx of insurance capital and with it, lower insurance pricing, is an opportunity for brokers to differentiate themselves by offering “value-added services”, such as the strategic advice and more tailored solutions that can also deal with M&A claims challenges.
The Aon report highlighted a year-on-year increase in W&I insurance notifications, with clients reporting higher severity claims and larger initial loss estimates. “Brokers should be prepared to handle more complex claims and provide robust support to clients navigating these processes,” said Vivekananda.
The study concluded that valid claims are being paid, insurers are accepting multiplied damages and policies are effectively allowing clients to mitigate deal risk exposure. “Brokers can emphasise the effectiveness of these policies in reducing post-deal disputes and protecting clients' interests,” she said.
The report, said Vivekananda, stressed the importance of brokers maintaining open communication with insurers throughout the claims process. “Brokers should leverage their commercial relationships to facilitate discussions and resolve any impasses that may arise, ensuring a smoother claims experience for clients,” she said.
Insureds, said Vivekananda, need to be ready to explain their valuation methodology and provide supporting documents when making a claim. “Brokers should advise clients on the importance of thorough documentation and possibly engaging accounting experts to support their claims,” she said.
W&I policy holders also need to be aware of their reporting obligations, said Aon’s expert, especially in cases involving third-party demands. “Brokers should ensure clients understand these obligations and the potential impact of litigation on coverage decisions,” said Vivekananda.
Industry stakeholders say other market studies, not just Aon’s recent report, show that W&I claims numbers are very high compared to other insurance lines and are going up as uptake increases.
“The growth in uptake of W&I policies over the past decade reflects the genuine risk faced by buyers suffering losses due to breaches of warranties,” said Ami Kalmath, Aon’s claims manager for financial specialties and transaction solutions in the Pacific.
She said the frequency of W&I claims, although high, is only a light increase on previous years. “This increase suggests that as more buyers become aware of the protection W&I policies offer, they are more likely to file claims when warranted,” said Kalmath.
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