Материал: Amy C Kläsener

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Special Issues in Connection with Warranty and Indemnity Insurance

the financial status of the target between signing and closing by means of warranties (e.g., as to the net working capital) or may provide for a purchase price adjustment mechanism to reflect these changes.

This can create an issue as to the coverage under the W&I policy, which may cover the warranty but not the price adjustment itself. Many insurers exclude coverage of purchase price adjustments. However, if the price adjustment relates to an issue that is also covered by a representation or warranty, the buyer could theoretically proceed either through the price adjustment clause in an expert determination or a claim under the W&I policy. Perhaps to counteract this risk, in insured transactions, purchase price adjustments are usually by a separate escrow in insured transactions.10

In addition, there is sometimes a dispute as to whether the expert accounting determination is properly viewed as final or final subject to manifest error and the effect of that determination on any subsequent arbitration (see Chapter 3).Where the arbitration is between the buyer and the insurer, the argument that the expert determination is not binding may be stronger (assuming that there is no agreement to the contrary in the policy).

All of this is a matter for drafting of the SPA and the W&I policy. However, where the boundary between issues subject to expert accounting adjudication and arbitration remains unclear, or expert determinations are called into question, the procedure may be further complicated by the involvement of an W&I insurer.

W&I insurance’s impact on arbitration

In a dispute, one initial issue will be whether the insurer is a party to the arbitration between buyer and seller, or whether the buyer may or must proceed first against the insurer under the SPA and the policy.

We understand that a current trend is to require the buyer to seek recourse against the insurer rather than the seller. This arrangement enables the seller to avoid in most cases the time and cost of dispute resolution proceedings. Additionally, we understand that the insurer frequently forfeits all subrogation rights against the seller except in cases of fraud.

Where the buyer is required to claim first under the policy and the only subrogation rights retained by the insurer are in case of fraud, formal dispute resolution proceedings are limited to three cases: (1) between the buyer and insured where the buyer contests denial of a claim under the policy; (2) between the insurer and seller for subrogation of claims arising from the seller’s fraud; or (3) between the buyer and the seller in relation to any uninsured claims.

Where the buyer is not required to proceed first against the insurer, a key issue is whether the insurer will participate directly in the arbitration. Some arbitration rules, such as the LCIA Rules, provide for the possibility of additional parties, subject to certain limits. However, where the parties wish to provide for the possibility of the insurers participating in the arbitration itself, it is highly advisable to include consolidation provisions in the arbitration clauses of both the SPA and the W&I policy.The issue is crucial as the wording

10See, SRS Acquiom, 2019 Buy-side Representations and Warranties Insurance (RWI) Deal Terms Study, p. 19 (October 2019).

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Special Issues in Connection with Warranty and Indemnity Insurance

of the W&I clauses can generally be expected to track liability under the SPA.Therefore, as illustrated in Ageas v. Kwik-Fit & Anor, liability under the SPA may well determine liability under the W&I insurance (subject to any deductible).11

As regards M&A insurance arbitrations between insurers and the insureds (usually the buyers and usually in respect of denied claims), there is an issue as to who the parties – or active parties – to the arbitration will be. For example, if there are multiple insurers contributing to various layers of an insurance tower, as discussed above, there will likely be as many separate policies and corresponding arbitration agreements.12

Decisions regarding a common arbitration may be quite difficult if left to the dispute stage given that the insurers may have differing interests depending on their different attachment points and different approaches to procedural issues. Given the time and cost associated with disputes regarding jurisdiction over additional parties or contracts, parties are well advised to consider and provide for an agreed approach at the contracting stage (see ‘Joinder or consolidation’, below).

All of this may create issues regarding the parties to, and scope of, any M&A insurance arbitration, as is illustrated in the complex situation dealt with in British-American Insurance v. Matelec Sal & Anor, which concerned two arbitrations relating to one insurance policy.13 Another option for parties to consider is a mechanism to permit decision-making with respect to the arbitral process at the time of the dispute, which could be modelled on the role of the agent of a financing syndicate in a loan facility.The agent is usually empowered to take minor decisions itself and more material decisions with the consent of the financing parties holding a majority interest in the facility. In many cases with syndicated loans, the financing parties share pro rata in all recovery. Therefore the syndicate lenders’ interests are aligned. However, where the interests of insurers in an insurance tower are not aligned (e.g., where a claim affects only insurers in the lower layers), this model could be unfair. Allowing decisions by a majority of insurers or weighted decision-making might be an option, assuming of course that the insurers have a say in joint decision-making.However,this approach runs contrary to insurers’traditional desire to retain as much control as possible over the legal situation. There are also the classic issues of what the insured may do without the consent of the insurers. In one of the few reported cases in this area, the insured settled without the insurers’ consent.The insured’s claim was dismissed in court proceedings as not falling within the excess coverage but also because the insured did not seek the insurers’ consent as it was

required to do under the W&I insurance policy.14

11Ageas (UK) Limited v. Kwik-Fit (GB) Limited and AIG Europe Limited [2014] EWHC 2178 (QB). In that case, the claim under the insurance policy was essentially a pass-through of the warranty claim under the SPA subject to deduction of the minimum.

12Insurers generally enter into separate policies with the insured, although in some cases groups of insurers may enter into a single policy (e.g., as open co-insurers) with the insured that provides for several (not joint) liability (see, e.g.,Article 77 of Germany’s federal Insurance Contract Law).

13British-American Insurance (Kenya) Ltd. v. Matelec Sal and Thika Power Ltd. [2013] EWHC 3278 (Comm).The parties in that case appear to have incurred substantial costs to determine whether arbitration provisions were applicable before even beginning to deal with the underlying issues.

14See Epstein and Keyes,‘Court Denies Coverage under Reps and Warranties Policy’, NewYork Law Journal Vol. 258 No. 101, Nov. 27, 2017. Ratajczak et al v. Beazley Solutions Ltd. 2016 WL 8117956 (ED Wisconsin 2016), and 870 F. 3d 650 (7th Cir 2017).

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Special Issues in Connection with Warranty and Indemnity Insurance

How does the involvement of a W&I insurer impact the truth-seeking function of the arbitration process? M&A arbitration between seller and buyer may already involve one step of removal from the most knowledgeable persons, who oftentimes are (or were) at the target.Where an insurer with little or no previous involvement with the target or the transaction steps into the shoes of the buyer, the insurer is now two steps removed from personal knowledge of the facts and circumstances of the case. In particular, when prosecuting claims of fraud by the seller, the insurer may be at an informational disadvantage.15

The effects of this on arbitral procedure are not yet known.We may begin to see more requests for judicial assistance in the taking of evidence from tribunals. In any case, where the seller or the buyer is no longer involved, both parties and tribunals will need to expend additional time in finding the facts.

This impact on truth finding may be greater in relation to W&I insurance than insurance of other externalised risks. In the case of liability insurance, for instance, the focus is usually on either certain external factors or the insured’s own behaviour. In the case of W&I insurance, whether a representation was correct as given or whether a warranty is observed is largely within the control of the seller or target.There may be more room for insurance fraud in the M&A context than with typical liability insurance.

Where issues regarding the interpretation of the insurance policies or their arbitration clauses arise in an arbitration, it is possible that none of the parties to the arbitration is able to provide evidence of intent or of the matrix of fact relating to the underlying transaction.This is because the policies are frequently arranged by the lead insurer and negotiated with the buyer’s broker.These negotiations may take place simultaneously with the various layers of insurers or sequentially, and these negotiations are typically done in the final days of a transaction.

Joinder or consolidation

When disputes arise that involve a number of insurers, the parties and arbitrators may be faced with thorny issues involving joinder and consolidation. Insurance policies in a tower are typically based on a form (usually the form of the buyer’s insurance broker). However, even if the policies contain identical arbitration clauses, consolidation of proceedings will not be possible under the rules of most arbitral institutions without agreement of all of the parties.16

If the buyer has procured insurance from more than a single insurer, any dispute may involve a multiparty and multi-contract situation. From the buyer’s perspective, it may make sense to resolve all coverage issues in a single proceeding. However, implementing this in arbitration requires careful drafting ex ante, and the insurers may have less interest in common proceedings.

15Insurers typically gain access to all information and documentation in possession of the buyer/insured, but claims of fraud often rely on evidence that is with the seller. In such cases, insurers would be well advised to ensure that the dispute resolution provision under the SPA provides for access for the insurers to relevant documents, which is something that may not be available in case of litigation in many civil law countries.

16For an exception see Article 22.1(viii) of the LCIA Rules.The corresponding provision of the 1998 LCIA Rules was discussed in C v. D1, D2 and D3 [2015] EWHC 2126 (Comm), upholding the joinder of a party to the arbitration. (One of the authors was presiding arbitrator.)

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Special Issues in Connection with Warranty and Indemnity Insurance

From the perspective of the insured, consolidation can be a key tool in reducing the length and cost of proceedings. If the tower consists of a primary and two excess layers, an insured could face three consecutive proceedings, in part covering similar or identical issues of coverage and quantum.

From the insurers’ perspective, consolidation may not be the preferred option. Insurers compete fiercely with each other. Each insurer may have a different approach to settlement. They will likely want to be represented by separate legal counsel, and they may not be able to agree on an arbitrator.

Insurers in the higher layers may resist consolidation on the basis that they have the right to wait until the insured has exhausted its remedies against insurers in the lower layers.This argument can be based on economics, as each layer of insurance is priced in light of all of the relevant risks, including the risk that the insurer will need to defend a claim in arbitration.

From a substantive perspective, the policies may contain different wording and trigger different coverage issues. When interpreting the policy wording to ascertain the parties’ intentions, recourse may have to be had to the insurance broker and arrangers who negotiated the policies on behalf of the insured and the insurers, who may not be parties to the arbitration.

Most importantly, as mentioned above, the interests of insurers in different layers will rarely be aligned. Insurers in the lower tiers may focus on coverage issues, whereas in the higher tiers they may focus more on quantum issues (whether the attachment point triggering their policy has been reached or whether the claim exhausts the layer).The insurers may have little incentive to work together.

From the arbitrators’ perspective, consolidated proceedings may be more difficult to handle because of the number of parties, counsels, briefs and differing perspectives.

Comparison with dispute resolution in the excess liability market

Although W&I insurance is relatively new on the market, other insurance products may be structured similarly and may provide a useful point of comparison. In terms of dispute resolution procedures, the interests of the insured and the insurers may be comparable with those of the insured and the insurers in relation to W&I insurance. Liability insurance tends to be structured similarly, in a tower with excess layers.

The Bermuda Form policies generally foresee London or Bermuda seated institutional arbitration.17 The forms have not yet adopted language foreseeing consolidated proceedings, and consolidation in either London or Bermuda is a matter of consent. For the reasons discussed above, insurers in a tower may have reasons to object to consolidation.18

17See Harris, Scorey and Geddes, The Bermuda Form: Interpretation and Dispute Resolution of Excess Liability Insurance, Oxford University Press.

18For a discussion, see Matin,‘The Bermuda Form Arbitration Process:A Glimpse Through the Insurers’ Spectacles’ (Norton Rose Fulbright), p. 8, available at https://www.nortonrosefulbright.com/-/media/files/ nrf/nrfweb/imported/20171107--the-bermuda-form-arbitration-process-a-glimpse-through-the-insurers- spectacles.pdf?la=en&revision=30e91ed8-cfc1-40e1-9696-66af3cf0bf26.

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Special Issues in Connection with Warranty and Indemnity Insurance

Alternatives to consolidated arbitral proceedings

There are a number of alternative ways to structure arbitral proceedings short of full consolidation.

These include appointing the same tribunal for all consecutive proceedings.19 This has the advantage of being easier to negotiate than full consolidation after the fact and may go a long way towards ensuring that the holdings in the various proceedings are consistent with each other.

As a variation, the parties could also appoint separate tribunals at the same time, with the higher layers agreeing to stay proceedings until the tribunal has issued an award under the primary policy.

Another option would be for the insurers in the higher layers to participate in the primary policy proceeding as observers or interveners.This could be done whether or not the higher layers agree to be bound by the awards. However, the primary policy insurer may not see any advantage in adding potentially controversial voices to its proceeding, in particular as primary insurers cannot know how and to what extent the interventions of the other insurers may complicate or delay the proceedings, potentially adding significant cost to the arbitration. Such an arrangement would at any rate need to include an agreement as to the division of costs among the insurers.

Parties and tribunals may consider procedural protections to ensure that the parties in consolidated proceedings are treated fairly. In particular on the insurers’ side, interests may not be aligned, and care must be taken to ensure that the interests of the insurers are not undermined by contradictory pleading. One way of addressing both the economics and fairness issues is to allow separate briefs to be submitted sequentially, as is frequently provided for in multiparty arbitration.This allows an insurer in a higher layer to wait and see whether the insurers in the lower layers have covered the relevant points and restrict its briefing to isolated points of difference and points specific to the higher layers. Staggering filings may satisfy the expectation of insurers in the higher layers that they will bear a smaller proportion of the cost and burden of proceedings.

Issues involving appointment of the arbitral tribunal

The appointment of arbitrators with the appropriate expertise may pose particular challenges in the case of arbitrations underW&I insurance policies.These disputes likely require expertise in insurance law and issues typical in M&A arbitrations, such as transaction experience and financial acuity. Parties will have to consider in any particular case which of these areas of expertise is more important.As the relative importance of these two areas of expertise cannot be foreseen when the policies are entered into, parties should be wary of defining too precisely the qualifications of arbitrators in the arbitration agreement.

The appointment process becomes much more difficult in the case of large towers made up of a number of individual insurers or syndicates, in particular where arbitrators are from firms with insurance practices. Conflicts of interest may be so difficult to handle

19In two related LCIA arbitrations there was provision for a sole arbitrator in one arbitration and a three-person tribunal in the other.The LCIA appointed one of the authors as sole arbitrator and presiding arbitrator.A challenge based on the parallel appointments was dismissed by the LCIA Court.

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