Setting the limit in Warranty & Indemnity insurance
Average read time: 2.5 minutes.
The recent decision of the Commercial Court in 116 Cardamon Ltd v MacAlister & Anor is a reminder that, when buying Warranty & Indemnity ("W&I") insurance, the purchase price in the SPA might not always be the best or only benchmark when setting the limit of liability.
Cardamon purchased 100% of the shares in Motorplus Limited, a company engaged in the selling of insurance policies which are added onto motor or household insurance. The agreed purchase price for the shares was just over £2.3 million and, under the terms of the SPA, this was also the maximum aggregate sum recoverable from the Sellers for any claim for breach of warranty. Unusually, the transaction was completed without any due diligence due to the Sellers' request that it be done quickly due to a pending tax liability.
The SPA contained several warranties regarding the truth, fairness, accuracy and proper preparation of Motorplus's accounts. Following the sale, several issues were identified with the accounts and Cardamon brought a claim against the Sellers for breach of warranty.
It was not disputed that the correct measure of damages was the difference between the value of the shares "as warranted" and their actual "as is" value. The Sellers' position was that the purchase price under the SPA was the best evidence of the value of the shares "as warranted"; being the price that a seller is willing to sell and a buyer is willing to buy the company for. Cardamon argued that the company had been sold at "something of an undervalue" because of time pressures, and that the "as warranted" value of the company was in fact much higher than the purchase price.
The Court agreed with Cardamon, saying that it would be:
"… wrong to take the indication of the Company's value afforded by the Purchase Price as indicative of its value without considering the full expert evidence as to value."
On the basis of expert evidence, the Court concluded that damages would exceed the purchase price and Cardamom recovered the full purchase price as a result.
Depending on the circumstances and the appetite within the market, it is possible to obtain a W&I policy that covers 100% of the purchase price. More typically, however, the limit of liability under a policy is set as a percentage of the asking price – typically up to around 50%. Either way, the lesson to be learned from Cardamon is that when setting the limit under a W&I policy, the true value of the shares "as warranted" should inform the limit of liability under the policy, and not simply the purchase price in the SPA.
Read our "introduction to warranty and indemnity insurance" here .
For more information contact Garbhan Shanks, Head of Insurance and Reinsurance at Garbhan.Shanks@michelmores.com / +44 (0)20 7659 4636 or Harriet Chopra, Senior Associate at Harriet.Chopra@michelmores.com / +44 (0)20 7659 4626.