M&A Deal Insurance Avoids Typical Legal Wrangling Over Coverage

Claims under insurance that covers losses resulting from breaches of sellers’ representations and warranties in M&A deals are climbing as carriers sell more policies, but the litigation that often accompanies high-dollar claims is nowhere to be found.

That’s because the claims process for reps and warranties insurance often involves private equity firms and other sophisticated repeat players that know what to expect, and insurers want to maintain their reputations by paying meritorious claims, industry professionals said. Even arbitration is extremely uncommon, claims specialists pointed out.

Euclid Transactional, a managing general agent specialized in transactional insurance, announced last month it’s reached $1 billion in reps and warranties claims paid over seven years. Despite the high payouts, Phil Casper, a principal at Euclid, said he can count on one hand the number of times a claim led to litigation or arbitration with policyholders.

The $1 billion milestone matters because it shows “proof of concept,” he said. “Insurance companies don’t necessarily have the best reputation for paying claims.”

A report on reps and warranties claims handled by broker Lockton showed that only 2% of filed claims were denied since the firm began tracking the outcomes. Liberty Mutual reported that it declined fewer than 10% of claims noticed since 2019. In comparison, denial rates for general liability claims hovered around 25% in fiscal 2024, a Sedgwick report found.

“If you have a covered claim, my experience is the insurers will pay something and then it’s usually an argument about how much to pay,” said Patrick McDermott, a policyholder attorney with Hunton Andrews Kurth LLP.

The reps and warranties market, which tracks deal-making activity, faces uncertainty in the months ahead as some Wall Street bankers and advisers scale back their hopes for an M&A boom in President Donald Trump’s second term, especially with economic headwinds arising from his tariff policies.

Sticking Points

Reps and warranties policies are most often purchased by the buyer in a transaction as an alternative to escrow, though sell-side policies also exist. They cover losses resulting from breaches of representations and warranties made by the seller in an acquisition agreement.

While the number of claims has held steady in proportion to policies placed in recent years, a growing portion led to big payments, industry reports show. Claims over breaches of financial statement representations represent the largest driver pushing up the amount paid by carriers.

The most common sticking point in the claims process is quantifying the loss caused by a breach, transactional insurance professionals agreed. Estimating the amount of loss drives disagreement because it can be subjective and accounting principles leave room for discretion, said Anderson Kill PC’s Carrie Maylor DiCanio, who represents policyholders.

Other sources of friction include the time it takes to resolve claims and a perception among policyholders that insurers ask too many questions.

Mark Schwartz, director of transactional liability claims at Lockton, said he advises clients to use the information-sharing stage of the process as an opportunity to educate insurers.

There is an information deficit between policyholders dealing with a breach and carriers that must catch up in order to understand the claim, he said.

Resolving Frictions

Still, the lack of formal disputes over reps and warranties claims suggests insurers and insured parties are successfully resolving frictions that arise in the process.

The world of reps and warranties insurance is fairly small and there are many of the same players when it comes to counsel, insurers, brokers, and even policyholders, industry attorneys said.

For example, private equity firms and their portfolio companies represent a significant portion of buyer companies and, as a result, routinely deal with reps and warranties insurance as part of the deal process.

When the same parties work together frequently, it allows them to develop trust and build relationships, said Andrew Shapiro, a partner at Pierson Ferdinand LLP who represents insurers. Most reps and warranties professionals described the claims process as collaborative and said there is typically a willingness to compromise from both sides.

The reps and warranties claims process may also differ from other lines because the parties involved often have a background in corporate dealmaking rather than litigation.

“Compromise and reaching negotiated solutions is more of their daily routine than it is for litigators,” McDermott said.

‘Success Story’

Additionally, because the reps and warranties market is small and the product is new relative to other types of insurance, carriers may have a business incentive to pay claims and maintain their reputation.

“Just because something is a large loss, doesn’t mean they’re going to deny or they’re going to be more difficult,” Schwartz said.

Reps and warranties insurance is a voluntary product, he added, so carriers know they must pay valid claims to remain viable with buyer companies, who could choose to forgo the product altogether.

The most common basis for denying a claim is when a policyholder fails to shown there was a breach of a warranty or representation, according to the Liberty Mutual report.

But the relatively smooth claims process overall indicates the insurance product tends to work well for both sides.

“The lack of litigation with reps and warranties insurance claims is a real success story,” said Sarah Mitchell, who leads Vinson & Elkins LLP’s transactional insurance practice. “The product is generally performing very well and that’s good news for both insurers and insureds.”