Start a Claim for Transactional Liability

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The vast majority of policies are purchased by the buyer in the underlying transaction, which is usually a share purchase agreement (SPA). Typically, coverage is triggered by the seller’s breach of the representations and warranties in the SPA.

If one part of the policy claim is showing that the seller breached the warranties or indemnities given, and the remaining part is proving the loss that has flowed from that breach which falls within the policy provisions for loss and/or is not excluded, such loss may be direct costs of resolving issues or settling claims. It may be tax that needs to be paid or it may be that the breach is such that it impacts on the valuation of the company and the loss is said to be, in effect, an overpayment of the purchase price.

The policy is usually indemnifying the buyer for breaches made by the seller in the relevant transaction. In that case a warranty is, essentially, a promise given by the seller as to some aspect of the business or its interactions with third parties.

For instance, the seller may warrant that there are no intimated or ongoing civil or employment claims against the company as at the date of the transaction. A breach therefore is simply the situation where the issue or thing that is the subject of the warranty is shown to be untrue. For example, the seller may warrant as to the accuracy of the target company’s financial statements or whether they comply with generally accepted accounting principles. A breach then would have occurred if the sellers’ financial statements were untrue.

A transactional liability policy will not cover any issue that is a breach of a representation or warranty known to the insured (usually the buyer) or was disclosed by (usually) the seller and should have therefore been known (or was otherwise generally known so as to have been accounted for in the purchase price).

There are other elements that are excluded on specific policies and transactions, and there are certain market standard exclusions that relate to matters such as accounts receivable, adjustment provisions, condition of assets, environmental remediation, pensions, specific indemnities and tax attributes.

Most transactional liability insurance policies will have a de minimis provision; this is a provision that is negotiated at the point of policy inception as to its amount and applicability.

In short, if there is a de minimis provision it will mean that if there is a covered breach, the policy will not respond if the associated loss falls below the de minimis sum stated in the policy schedule.

Transactional liability insurance policies are bespoke and unique to the underlying transaction that is being insured. Often there will be a distinction between fundamental warranties, standard warranties and tax warranties/covenants.

Fundamental warranties are usually those promises given by the other party in the transaction that are considered very important, if not essential, to the decision to proceed with the transaction. As a result, these are often treated differently in the policy; they may have no retention associated with them and will likely have a longer policy period (and will probably not be subject to the de minimis rules).

Standard warranties are those warranties given that are considered less critical to the transaction as a whole. These will usually be subject to the full policy retention and have a much shorter policy period.

Tax covenant/warranties are promises made regarding repayment of taxes by the seller or generally with regard to tax matters, respectively. Breaches of these provisions are usually subject to the policy excess but have a much longer policy period, mainly because tax liabilities often take a long time to crystallise.