Top Ten Things to Know about Representations and Warranties Insurance

This post was written by Courtney Horrigan.

1.  Representations and Warranties insurance has quickly risen to become a standard topic of discussion in many merger and acquisitions transaction negotiations.

2.  Representations and Warranties Insurance is not a new product – but until recently its use has been limited because of prohibitive premium pricing and buyer concerns as to whether insurers would actually pay on claims. The insurance market is working to bring prices down and establish a payment history.

3. The insurance protects against breaches of contractual representations and warranties that the seller makes in transaction documents. It can be written to cover all or some of the seller’s contractual representations and warranties.

4. Although traditionally it’s been the buyer that purchases representations and warranties coverage, both buyers and sellers can purchase this insurance. If a buyer purchases it, it’s a “buy-side” policy, and if the seller purchases it, it’s a “sell-side” policy.

5. A “buy-side” policy provides first-party coverage – meaning that it allows the buyer to recover from the insurer for its losses due to a seller’s breach of a representation or warranty.

6. A “sell-side” policy provides third-party liability coverage – meaning that it allows the seller to tender to its insurer a claim from the buyer alleging that the seller mistakenly breached a representation or warranty made at the time of closing. (Sell-side policies exclude coverage for intentional breaches.)

7.  Representations and Warranties insurance may protect the buyer if it relies upon inaccurate warranted facts when calculating the value of the target company.

8.  And Representations and Warranties insurance can allow the seller to reduce or eliminate indemnification reserves or escrows, allowing the seller to distribute the funds from a transaction more quickly.

9. So both buyers and sellers can use Representations and Warranties insurance to resolve impasses in negotiations over whether a specific representation or warranty will be issued, the scope, duration and limits of an indemnity, or the size of an indemnification escrow.

10. Next to cyberliability insurance, Representations and Warranties Insurance may represent the hottest trend in insurance heading into 2015.

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Remembering Dr. King – Is There a Place for Extremists?

Today, as we remember and honor one of our country’s leading exponents of activism in the fight for unity and equal opportunity, we also face ongoing divided government in Congress and in many parts of the country. These divisions have resulted in inactivity and a tedious inability to get things done—important problems remain unsolved and even routine matters prove too tough to finish. 

Dr. King had a lot to say about the need for people of good will to unify around issues that demand action, especially the interlocked issues of poverty and race.  Although his most famous accomplishments and words involved race equity and civil rights, he was killed while pursuing the essential next step: economic justice. Dr. King advocated for the government’s role in ensuring a humane safety net, a fair opportunity for upward mobility, and a voice for people in poverty – some power – to determine what the government would do on these issues.  He had shifted his focus, highlighting that racial justice could not be complete without economic justice.   

One year before his assassination, Dr. King gave a speech on poverty at Stanford University (his “other America” speech). Pursuit of economic justice had provoked backlash and hatred on the streets of Chicago and firm resistance from people who had previously supported the civil rights movement in the South. He noted:  

[W]e must see that the struggle today is much more difficult. It's more difficult today because we are struggling now for genuine equality. And it's much easier to integrate a lunch counter than it is to guarantee a livable income and a good solid job.  It's much easier to guarantee the right to vote than it is to guarantee the right to live in sanitary, decent housing conditions. It is much easier to integrate a public park than it is to make genuine, quality, integrated education a reality. And so today we are struggling for something which says we demand genuine equality

In the same speech Dr. King stressed that, while the changing of hearts and minds is essential to the ultimate goal of equality, legislation—a role for government—is also required. He noted that, while you cannot force a man to love you, you can prevent him from lynching you. Laws, enforcement, and programs are needed to realize the dream of economic justice for all.

Later, while he and his allies were in the midst of launching a major effort on poverty in Washington, Dr. King went to Memphis to support striking sanitation workers. In his last sermon (the famous “mountaintop” speech), he explained to the audience that the cause was urgent, and not something for religious patience:

It's all right to talk about "long white robes over yonder," in all of its symbolism. But ultimately people want some suits and dresses and shoes to wear down here. It's all right to talk about "streets flowing with milk and honey," but God has commanded us to be concerned about the slums down here, and his children who can't eat three square meals a day. It's all right to talk about the new Jerusalem, but one day, God's preachers must talk about the New York, the new Atlanta, the new Philadelphia, the new Los Angeles, the new Memphis, Tennessee.  

Today, our legislatures seem to be under the control of extreme elements that refuse to compromise or, perhaps more accurately, refuse to participate in governing with people who do not think exactly like them. We live in an era where compromise is equated with weakness. Too often, elected officials seem to prefer no action to accomplishments that are not fully aligned with their ideas.  In the face of injustice and poverty crying out for action, our country’s progress has been held hostage by extremists of stasis.

Dr. King had things to say about extremism. Earlier in his career, he had been jailed in Birmingham for leading nonviolent disobedience to the Jim Crow laws. In a public letter, moderate “liberal” clergy had criticized him for these tactics and called them—and him—extremist. In response, Dr. King explained how he at first resisted that accusation, but then realized he should embrace it:    

So the question is not whether we will be extremists, but what kind of extremists we will be. Will we be extremists for hate or for love? Will we be extremists for the preservation of injustice or for the extension of justice? … Perhaps the South, the nation and the world are in dire need of creative extremists.

The cause of economic justice is still urgent, and it too often is blocked by extremists of stasis. Today, as we ponder Dr. King’s legacy, we should understand the important role of government in ensuring fair opportunities for upward mobility, and we should welcome creative extremists in that just cause.  



President Obama Acknowledges Growing Cybersecurity Threats to the Government and Economy, Proposes New Measures to Fight Cyber Risks

This post was written by Courtney C.T. Horrigan and Caitlin Garber.

Just days after news broke that ISIS hackers forced the shutdown of the U.S. Central Command’s Twitter account, President Obama met with congressional leadership, members of the Federal Trade Commission and the Department of Homeland Security to unveil a proposal to facilitate increased cooperation between the private sector and government to combat growing cybersecurity threats. Citing concerns with preserving national security, public safety and public health, the President proposed new federal cybersecurity legislation, emphasizing that although our digital economy “creates enormous opportunities,” it also “creates enormous vulnerabilities for us as a nation” that are growing and costing us billions of dollars. In remarks on Tuesday at the National Cybersecurity Communications Integration Center, the President further acknowledged the serious legal and liability issues involved with private companies sharing information with the government, and argued that his proposed legislation “includes essential safeguards to ensure that [the] government protects privacy and civil liberties” and other liability protections for companies that share information on cyber threats.

President Obama’s remarks also reflect growing regulatory concerns about consumer protection and whether consumers are being promptly notified of breach incidents. The proposed federal legislation creates a national standard requiring companies to notify consumers of actual or potential breaches of their personal and financial data within 30 days.

Timely notice to cyberliability insurers providing coverage for first-party and third-party losses caused by or related to data breaches should also quickly follow any cyber event. Many data security and privacy risk policies offering coverage for third-party claims arising from a data security event require notice to the cyberliability insurer as soon as practicable or within a specified period of time after the claim is made. Likewise, certain first-party cyberliability coverages require notice of an event (and possibly submission of a proof of loss) within a specified period of time following an insured’s discovery of the data breach or loss. Identifying all potential sources of insurance coverage in advance of a breach, and understanding the insurance notice requirements if a breach occurs or a claim is made, are critical components of any data breach response plan.


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Lessons Learned: Report All Potential D&O Liability Insurance Claims Without Delay

This post was written by Courtney C.T. Horrigan.

The District Court of Massachusetts’ January 6, 2015 opinion in Biochemics, Inc. v. Axis Reinsurance Co., 2015 WL 71493 (D. Mass. Jan. 6, 2015), reaffirms the importance of providing timely notice of all D&O liability claims – including subpoenas. In Biochemics, the policyholder sought coverage from its primary D&O liability insurer, Axis, for defense costs it incurred in an SEC enforcement action commenced during the AXIS policy period. Judge Rya Zobel held that Biochemics had no coverage for the SEC enforcement action because it related back to two deposition subpoenas that the SEC served on Biochemics before the AXIS policy incepted. Because those deposition subpoenas indicated on their face that the SEC had commenced a formal investigation against Biochemics, each subpoena was a “Claim” that should have been reported to Biochemics’ prior D&O carrier. Because the Claim was “first made” before the AXIS policy period, Judge Zobel granted AXIS’ motion for summary judgment and found that AXIS owed Biochemics no coverage under its policy.

Judge Zobel noted that the AXIS policy defined the term “Claim” broadly to include any “civil, arbitration, administrative or regulatory proceeding against any Insured commenced by … the filing of a notice of charge, investigative order, or like document.” Biochemics, Inc. v. Axis Reinsurance Co., 2015 WL 71493, at *3. Biochemics did not dispute that it had been served with two SEC deposition subpoenas during the prior policy period that were captioned “In the Matter of Biochemics, Inc. (B-02641)” and sought documents regarding Biochemics operations from 2007 forward. Judge Zobel found that the caption and contents of the SEC subpoenas put Biochemics on notice that it was being investigated by the SEC for alleged misconduct. Although the subsequent enforcement action alleged misconduct from 2009 until mid-2012, and relied in part on purported misconduct that occurred after the first document subpoena was issued, Judge Zobel did not analyze the overlap between the deposition subpoenas and the allegations in the enforcement action and instead simply found that:

“[e]ach subpoena was issued under, and referred to, the original Formal Order, and investigated the same officers and company for the same pattern of security violations through public material misstatements. Under the clear language of the policy and on the record before the court, the subpoenas all constituted a single “Claim” under the policy.”

Biochemics, Inc. v. Axis Reinsurance Co., 2015 WL 71493, at *3.

Because the policy language unambiguously stated that a claim “shall be deemed to be first made on the earlier date that: (1) any of the Claims is first made against an Insured under this Policy or any prior policy….” Judge Zobel held that the SEC enforcement action was “first made” when the first deposition subpoena was served on Biochemics. Accordingly, the SEC enforcement action did not arise during the AXIS policy period.

Biochemics makes clear that policyholders should always give notice of any event that could be considered a “Claim” under a D&O policy. There was no allegation that AXIS was prejudiced by any late notice, but that fact was irrelevant to Judge Zobel’s decision under Massachusetts law. Policyholders should negotiate notice provisions that require the policyholder to give notice only when specified persons within the company – such as the Insurance Risk Manager and General Counsel – become aware of the event that constitutes a Claim. And when a Claim comes in, notice to the insurance company should quickly follow.

Wisconsin Supreme Court’s misapplication of the pollution exclusion and disregard for policyholders’ business and purpose in purchasing insurance

This post was written by Mike Sampson and Caitlin Garber.

Last week, the Wisconsin Supreme Court issued two opinions in which it held that pollution exclusions barred coverage for third-party claims resulting from alleged contamination of water due to the seepage of cow manure and septage, respectively. As addressed in Chief Justice Shirley S. Abrahamson’s dissents to the two decisions, the majority’s opinions in both cases – Wilson Mutual Insurance Co. v. Falk, Nos. 2013AP691, 2013AP776, 2014 WL 7375656 (Wis. Dec. 30, 2014), and Preisler v. General Casualty Insurance Co., No. 2012AP2521, 2014 WL 7373070 (Wis. Dec. 30, 2014) – were faulty for a number of reasons.

Notably, Preisler considered whether there was insurance coverage available for claims against companies that haul, store, and/or dispose of septage. As the Chief Justice explained, “[t]hese septic companies purchased general liability policies to insure their business operations, that is, they purchased insurance policies to cover damage they might cause in the ordinary course of their hauling, storing, and disposing of septage.” But when that very damage occurred, the majority held that septage was a “pollutant” and that coverage for the claims was therefore barred by the applicable pollution exclusion.

This thinking is deeply disconcerting as it overlooks the very reason that these companies would have purchased insurance. Indeed, Justice Abrahamson observed:

I conclude that a reasonable person in the position of the insureds, two companies in the business of hauling, storing, and disposing of septage, would not consider septage a pollutant under the pollution exclusion clause of general liability policies they purchased to cover liability for damage caused by their septic business operations.

Justice Abrahamson was right to consider why the companies would have purchased insurance in the first instance. Indeed, in assessing the application of a pollution exclusion, it is imperative that a court consider the nature of the business in which the policyholder is engaged. It would seem troubling to conclude, for example, that an insurer can take a policyholder’s premium and then invoke a pollution exclusion to bar coverage for the very business that the policyholder is engaged in and the very risk for which the policyholder needed insurance in the first instance.

Better reasoning was offered by the Indiana Court of Appeals in Great Lakes Chemical Corp. v. International Surplus Lines Insurance Co., 638 N.E.2d 847 (Ind. Ct. App. 1994), a case deciding whether there was coverage available to a chemical company for claims alleging that the company’s pesticide contaminated soil and groundwater. That court opined:

[The chemical company], like most manufactures, purchased liability insurance to protect itself from damage caused by its products. Here, because of the nature of the product and its intended use, the damage caused by [the pesticide] was environmental pollution. However, simply because the damage alleged in the underlying lawsuits is environmental damage does not mean that the pollution exclusion clauses should automatically apply to exclude coverage. In this case, the underlying claims against [the chemical company] are not in the nature of intentional or negligent environmental pollution; they are essentially product liability claims. To hold that the pollution exclusion clauses bar coverage to [the chemical company] for the [pesticide] claims would render the insurance coverage purchased [by the chemical company] illusory.

As in Great Lakes Chemical, just because the damage at issue in the Wisconsin cases is damage to the environment, that does not mean that the pollution exclusion must necessarily bar coverage.