Interpreting warranty and indemnity insurance policies – the courts will not make good a bad bargain (2024)

Last year we reported on a rare judgment handed down in a case involving a dispute about coverage under a Warranty and Indemnity Policy (W&I Policy).

In Finsbury Food Group Plc v AXIS Corporate Capital UK Ltd & Ors [2023] EWHC 1559, the Commercial Court considered whether there had been a breach of the relevant warranty giving rise to an insurable loss, and provided helpful guidance on how the court would consider whether a material adverse change has occurred as well as key issues relating to valuation and causation.

Having waited so long for a W&I Policy related judgment, we only had to wait a few months for the next one. Project Angel Bidco Ltd v Axis Managing Agency Ltd & Ors [2023] EWHC 2649 (Comm) (31 October 2023) (bailii.org) (Project Angel) involved consideration by the Commercial Court, in a trial of preliminary issues, of whether losses arising from a breach of a warranty listed as "covered" in an appendix to a W&I Policy could still be specifically excluded from cover under provisions contained in the main body of the policy itself.

Background

In accordance with the terms of a Sale and Purchase Agreement (the SPA) entered into in November 2019, the claimant purchased the shares of a construction company (the company) from the sellers. Following completion the claimant entered into administration and the company was placed into liquidation, allegedly as a result of conduct by the sellers engaging in activity which the parties agreed could remain confidential but acknowledged was the subject of an ongoing police enquiry.

The SPA contained a number of warranties, which included (amongst others) that;

• There were no pending or threatened legal proceedings;
• There were no investigations or enquiries underway; and
• No offences had been committed under the Bribery Act 2010 which involved the company's directors, officers or employees (the "ABC Liability Warranty).

The claimant made a claim under a Buy Side W&I Policy (the policy), alleging breach of the ABC Liability Warranty. This type of W&I Policy provides a buyer with cover against the risk of a breach of warranty given by the seller in the SPA, resulting in the actual value of the target company being worth less than its value as warranted – at the date when the warranty was given.

The policy included a Schedule ("Appendix C - Cover Spreadsheet") that confirmed which warranties in the SPA were covered by the policy and the schedule specifically identified the ABC Liability as a 'covered' liability.

However, the W&I Policy also contained an exclusion clause which provided that;

"The Underwriters shall not be liable to pay any Loss to the extent that it arises out of…any ABC Liability".

And the definition of "ABC Liability" was confirmed 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 claimants alleged that (i) the sellers were in breach of the ABC Liability Warranty, (ii) the ABC Liability Warranty was identified as a covered liability, and (iii) insurance cover under the policy should therefore be provided.

The insurers did not agree and argued that any ABC Liability was excluded as a result of the exclusion clause contained in the policy.

The claimants also argued that there had been an obvious mistake in the drafting of the exclusion clause and that mistake should be rectified by the court. The ABC Liability definition shouldhave read "any liability for actual or alleged non compliance…" instead of "any liability or actual or alleged non compliance…". The exclusion clause only applied to liability for actual or alleged non compliance – it did not apply just to the fact of actual or alleged non-compliance with anti-bribery or corruption laws.

The insurers did not accept this argument. Its position was that the ABC Liability definition covered three different situations; a liability, actual non-compliance, and alleged non-compliance – and each of those situations was excluded.

Decision

The Commercial Court dismissed the claimants' claim and found for the defendant insurers.

The court held that the reasonable policyholder would have interpreted the ABC liability Warranty as being excluded under the policy. The policy was a fairly typical policy which listed in an appendix those warranties that were 'included" and covered by the policy. The appendix made it clear that notwithstanding a particular warranty being included in the scope of cover provided by the policy, certain losses may still be excluded from cover pursuant to a relevant general exclusion clause. The court's view was that a liability would need to be covered in order to be excluded so there was no conflict between the detailed policy wording and the appendix.

Furthermore, the exclusion clause was clear and unequivocal: it excluded the liability of, or the fact of, actual or alleged non-compliance with anti-bribery or corruption laws. The principles that apply to the construction of an insurance contract (including a W&I Policy) are the same that apply to the construction of any other contract. There was no obvious error. The ABC Liability definition covered three instances of liability, and each made sense when read together with the insuring clause and the other provisions of the policy.

Comment

The decision highlights the importance of reading a W&I Policy as a whole, carefully considering any appendices setting out the warranties covered against any specific exclusions that may be set out elsewhere in the policy.

In addition, where an exclusion clause is clear a policy holder – indeed any party to a contract – cannot argue mistake to try and persuade the court to improve a bad bargain that has already been agreed.

Our Commercial Disputes team regularly advises on post-M&A disputes, including breach of warranty claims against sellers (and the defence of such claims) and claims under W&I Policies.

Please contact Samantha Holland, Susannah Fink or Sean Adams for further information, or to discuss any of the key points raised in this article.

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