Annual Insurance Review 2024: Warranty & indemnity

In this chapter of our Annual Insurance Review 2024, we look at the main developments in 2023 and expected issues in 2024 for Warranty & indemnity.

Key developments in 2023

From mid-2022 into the first half of 2023 we have seen global M&A activity continue to decline from post-pandemic boom levels, with a reduction in both global deal value and deal volume. Many investors and sellers particularly in respect of large transactions (GPB 750m +) adopted a "wait and see" approach hoping for more favourable market conditions in the face of fears of global recession, rising interest rates and inflation, and a hostile geopolitical context. However, global M&A activity has fared better than most expected in 2023, particularly as small to mid-level transactions have remained relatively resilient. Further, expectations have adapted to the market conditions and the market has shown signs of improvement as the year has evolved. 

In 2023, the W&I market has continued to be resilient as cautious buyers and sellers have sought cover in economically and geopolitically volatile times. The W&I market has continued to expand globally, particularly in markets in Asia and Latin America. We have also seen unprecedented claims lodged under W&I policies in 2023 in the wake of the aftermath of the record policy placements in 2021 and early 2022. 

We have also seen increased W&I litigation in the UK, and authoritative case law emerge from it. The High Court handed down its judgment in Finsbury Foods v Axis relating to an acquisition of a gluten-free bakery business that it was alleged a price and recipe change was not disclosed. This was the first case that every aspect of a W&I claim has been fought and considered by a Court in the UK – Insurers succeeded on every basis. We have also seen the High Court dismiss Project Angel Bidco Ltd v Axis, as it held that the policy did not cover corruption-related losses linked to the buyout of a construction firm that collapsed amid bribery allegations. There is also another ongoing proceeding of CIEP v Liberty, which may add to evolving authorities. 

What to look out for in 2024

Global M&A is expected to continue to improve in the face of stabilising market conditions. There is a substantial backlog of transactions that are now becoming active, and this will likely continue into 2024.  M&A activity has the potential to increase with continued focus on digital transformation, AI adoption, and also trends of pharmaceutical companies and biotech firms pairing up. However, such activity bouncing back to the heights of post-pandemic boom seems unlikely.

Given the restricted access to debt financing and depressed market valuations we expect the growth of secondaries transactions (especially GP-led secondaries) to continue. These transactions can raise particular concerns in relation to the scope of due diligence and disclosure, especially where there is an element seller rollover, which insurers should be alive to. 

Synthetic W&I structures, which involves the Insured and Insurer agreeing on various warranties in the policy directly between themselves, are being increasingly considered in the face of a precarious economic environment, particularly in respect of insolvency sales. Synthetic W&I policies are being increasingly considered in various types of transactions, particularly with its benefits of efficiency and this may be a potential structure for W&I insurers to explore further. 

ESG continues to be an increased focus of warranties, and the importance of ESG due diligence is intensifying. We also expect to see the increase in renewables M&A activity in certain European jurisdictions such as Spain translate into connected claims arising around availability of tariffs, planning and consents. 

Written by Nick Cumming.