Warranty and Indemnity Insurance: a growing body of case law

Introduction

In 2023 we saw the start of a body of case law in relation to warranty and indemnity (W&I) insurance claims, which claims have not been the subject of judicial consideration since 2014¹ . Firstly, judgment was handed down by the Commercial Court (England and Wales) in Finsbury Food Group Plc v Axis Corporate Capital UK Limited & Ors [2023] EWHC 1559 (Comm) in June 2023, which was followed by the judgment in a trial of preliminary issues heard by the Commercial Court in September 2023, in Project Angel Bidco Limited (In Administration) v Axis Managing Agency Limited & Ors [2023] EWHC 2649 (Comm) (which was subject to an appeal to the Court of Appeal with judgment being handed down in May 2024)² .  

The use of W&I insurance has increased over the last ten years, with broker HWF estimating, in a recent claims market report, that, in the period 1 January 2016 to 30 June 2023, over 10,000 policies had been placed³.  It is therefore helpful that there has been some growth in English case law demonstrating how the courts will deal with aspects of claims under these policies, even if some of the issues are inevitably discrete to the claims being addressed.

HWF have reported that a material number of claims are being paid⁴; as such, the lack of case law to date suggests that insureds and insurers have been able to resolve claims amicably without resorting to litigation⁵. We note that in both of the 2023 reported cases, the court found in favour of insurers. On the facts of these cases, the outcomes were perhaps unsurprising, with the courts reaffirming, for the benefit of all parties, the extent of losses which W&I insurance is designed to cover, as well as providing guidance on the valuation of claims and the application of policy exclusions. 

Given the modest number of claims which have come before the courts to date, it remains to be seen whether 2024 will see an increase in this growing body of case law. We set out below our summary of the 2023 cases and the key points arising.

Finsbury Food

This claim related to the acquisition by Finsbury Food Group Plc of Ultrapharm Limited, a manufacturer of specialist gluten free products. The consideration was £20m, and Finsbury Food alleged that breach of warranties relating to trading conditions and price reductions had reduced the value of the business by circa £3.2m.

Actual Knowledge 

In finding that there was no breach of warranty, the court provided useful commentary on the knowledge provisions in the policy. The warranties themselves were subject to a knowledge qualifier, and as is typical, the policy excluded a claim in circumstances where the buyer’s deal team members had “Actual Knowledge” of a breach. “Actual Knowledge” was defined by the policy as the “actual personal knowledge” of the relevant person, which did not include “constructive or imputed knowledge”.

The Court determined that, even though the deal team member did not have express awareness of the likelihood of a warranty claim (because he had not given it any particular thought), had he done so, he would have, or at least should have, considered that these facts would have been reasonably likely to give rise to a warranty claim. 

The insured had argued that this was insufficient to amount to personal knowledge, whereas insurers had argued that the deal team member possessed all the relevant facts and did not need to be told “2+2 equalled 4…he simply needed to be provided with the data 2+2”. The insured conceded that Nelsonian knowledge applied, which the court regarded as realistic, and therefore had there been a breach of warranty, it would have been excluded on the account of Actual Knowledge. W&I policies will typically state that the onus is on the insurer to demonstrate actual knowledge, given it will usually be part of an exclusion, and this should act as helpful guidance to enable the parties to demonstrate whether or not this test has been met. 

Valuation

The court heard evidence on the basis of EBITDA multiples, which is the typical methodology which applies to valuation. Buyers will typically value the target entity by using the EBITDA multiplied by a negotiated multiple. However, this methodology will only apply to assessing a claim valuation in circumstances in which the insured can demonstrate that this was the basis used to value the target. On the facts, Finsbury Food had determined the purchase price by reference to the annual value of sales. It was therefore not open to Finsbury Food to seek to apply a multiple to its breach of warranty claim, with the valuation instead being limited to the reduction in the annual value of the sales.

Angel Bidco

This claim related to the acquisition by Project Angel Bidco Limited of Knowsley Contractors Limited, an entity which provided engineering and construction services. The consideration was circa £16.7m and Angel Bidco alleged that breach of warranties relating to anti-bribery and corruption (ABC) compliance meant that it had suffered losses significantly in excess of the £5m policy limit. 

The ABC exclusion

Under the ABC exclusion in the policy, any loss was excluded “to the extent that it arises out of… any ABC Liability”. ABC Liability was defined as, “any liability or actual or alleged non-compliance by any member of the Target Group or any agent, affiliate or other third party in respect of Anti-Bribery and Anti-Corruption Laws”.

The insured argued that the definition of ABC Liability contained an “obvious minor error”, such that the first instance of “or” should have been “for” (so the exclusion should be read as “any liability for or actual or alleged non-compliance by any member of the Target Group or any agent, affiliate or other third party in respect of Anti-Bribery and Anti-Corruption Laws”) and the error could and should be corrected by the court as a matter of construction. If the insured’s argument was upheld, the ABC exclusion would not apply, because the conduct it relied on as being in breach of the ABC warranties consisted only of allegations which had not given rise to any liability.

At a preliminary issue trial, the court reaffirmed that the framework principles that apply to the construction of a W&I policy are the same as those that apply to any other contract (see FCA v Arch Insurance (UK) Limited and others). Accordingly, the court would seek to ascertain what a reasonable person in the shoes of the insured, having read through the policy conscientiously, would understand regarding the cover provided. As the clause was not “inherently absurd or obvious nonsense”, the court declined to re-write the policy, finding that the relevant provision made sense when read together with the insuring clause and other provisions of the agreement. 

The warranty spreadsheet

The policy was structured in the commonly seen manner of W&I policies, with a policy wording and cover spreadsheet, setting out a list of the covered warranties. The cover spreadsheet had indicated that the ABC warranties were “covered”, which the insured asserted assisted it in its argument. However the court found that the function of the cover spreadsheet was to identify those obligations for which in principle cover is provided and for an exclusion to bite, it had to be in relation to a warranty otherwise covered.

This is an important reminder, that whilst it is imperative that warranty spreadsheets accurately set out the coverage position, that they cannot be read in isolation.

Court of Appeal

By a majority, the Court of Appeal dismissed the insured’s appeal, and Lewison LJ in the leading judgment commented that from the point of view of insurers, there was a coherent and rational explanation as to why the ABC exclusion took the form that it did and that whilst the breadth of the exclusion did appear to take away the cover which was referenced in the warranty spreadsheet, insurers had argued that there were some breaches of warranties relating to ABC which could be capable of falling outside of the ABC exclusion. As such, there was no clear drafting error for the court to remedy.

Conclusion

While the two cases are somewhat unusual, both in their facts and the arguments raised, arguably with outcomes that were to be expected, it is perhaps the beginning of a trend which may see further W&I claims before the courts, addressing both subjective issues and issues of wider application.

Footnotes

1. In the case of Ageas (UK) Limited v Kwik-Fit (GB) Limited and AIG Europe Limited [2014] EWHC 2178 (QB).
2. [2024] EWCA Civ 446
3. https://www.hwfpartners.com/insights/market-claims-study/ ; the policies addressed in the judgments were issued in August 2018 and December 2019 respectively.
4. Claims were paid on 5.48% of policies over the period 1 January 2016 to 30 June 2023.
5. Recognising that many W&I policies provide for arbitration.