Targeted Discovery in Arbitration Disputes Involving Representations and Warranties Insurance

Originally published by CCBJ (Corporate Counsel Business Journal), September 2018

As mergers and acquisitions worldwide exceed $3 trillion annually, the market for representations and warranties insurance has accelerated. The insurance is designed to protect against the breach of a representation or warranty in an M&A transaction, and is seen as a way to facilitate rapid closing of transactions. The growth in the market for this insurance has been helped by insurance company promises of efficient underwriting and rapid response to claims, and many insurance companies have entered the market in recent years.

Claims frequency also has increased, with claims currently being brought under about 20 percent of policies sold. Unsurprisingly, the largest deals have the highest claims frequency and the largest claims pay-outs. Among the largest causes of claims are compliance with laws, financial statements, tax-related issues and intellectual property disputes.

There are almost no reported cases involving insurance coverage disputes under representations and warranties policies. Some of this may be due to coverage issues being more readily resolved through negotiation than, for example, coverage issues in environmental claims.

The more likely reason, however, is that most representations and warranties policies have arbitration clauses that preclude litigation. If a policy does indeed include a mandatory arbitration clause, representations and warranties policyholders should take into account key differences between arbitration and litigation procedures and tailor their strategy accordingly, should a claims dispute occur.

Arbitration is considered to promote more efficient and cost-effective resolution of disputes than judicial litigation. In addition to offering speed and cost savings, arbitration is final. Courts read arbitration agreements broadly, even in standard-form, non-negotiated contracts. Insurance companies choose arbitration over litigation in order to avoid various rules that courts have developed that favor policyholders, such as construing ambiguities in favor of insurance coverage.

Working With Minimal Discovery

Perhaps the biggest difference between judicial litigation and arbitration is the scope of pretrial discovery. Judicial discovery is exceedingly broad, with the scope of "relevant" discovery broadened to include matters that may lead to relevant evidence. The Federal Rules of Evidence have limitations on the number of...