W&I insurance claims - late notification

We consider the issue of late notification under a W&I policy, and the recent decision of Cardamon v MacAlister.

Summary

We considered some aspects of the decision in Cardamon v MacAlister in this article. Here we consider that same decision in the context of late notification; part of Cardamon’s claim was held to be time barred because the basis of that claim was changed outside a two-year period prescribed by the SPA.

Although the question of late notification under a W&I policy will turn on the specific wording of the relevant notification clause in the policy, insurers may also be entitled to decline cover on the basis of late notification in the event that the insured has failed adequately to set out the basis of its claim for breach of warranty within the limitation period specified in the SPA.

Scope of indemnity

Generally, the scope of indemnity under a buyer’s side W&I insurance policy is defined by reference to the loss that the insured would be contractually entitled to claim against the seller (or warrantor) under the Share Purchase Agreement (SPA) in respect of the breach of a covered warranty.

Typically, a SPA will provide that the seller shall not be liable for a breach of warranty claim unless the buyer has provided notice in writing of such claim, including a summary of the basis for the claim and the amount claimed, within a stipulated period after completion (usually a period of two or three years depending on the nature of the particular warranty in question).

In the event that the buyer gives notice of a claim within the contractual limitation period, but the basis of that claim subsequently changes following further investigation and that change is expressed to the seller after the limitation period has expired, the Courts have held that the claim was not adequately notified and is, therefore, time-barred under the SPA. See, for example, Teoco v Aircom.

Assuming that the wording of the policy mirrors that of the SPA, insurers are entitled to take the same technical point and decline cover on the basis of late notification.

Cardamon v MacAlister

Cardamon involved the quick sale and purchase of a small company. Post-acquisition, when it transpired that the accounts did not accurately reflect the true financial position of the company, Cardamon claimed against the sellers for breach of the accounts warranties in the SPA.

The SPA stated that “the Seller shall not be liable for a Claim unless notice in writing of the Claim, summarising the nature of the Claim (insofar as it is known to the Buyer) and, as far as reasonably practicable, the amount claimed, has been given by…the Buyer to the Seller…on or before the second anniversary of completion”.

Cardamon did put the sellers on notice of a claim within the requisite two-year period, based on an alleged non-disclosure of the target company’s model for remunerating insurance brokers. At that stage they characterised their claim as one for breach of a warranty that the target’s accounts were not “misleading in any material respect”.

Cardamon subsequently changed the basis of this aspect of its claim after the two-year period had expired, relying instead on breach of a warranty that the target’s accounts were “not affected by any unusual or non-recurring items”.

The court held that this aspect of the claim was time-barred as it was not notified within the limitation period.

What this means for insurers

Some W&I policies do not require the service of an underlying notice of breach of warranty in order for the policy to be triggered. However, where they do, Insurers may be entitled to decline a claim for late notification in the event that adequate (and accurate) details of the basis of a breach of warranty claim have not been notified within the requisite contractual limitation period. Although this is a technical point, which insurers may be reluctant to take bearing in mind the buoyancy of the W&I market, it is a valid one and worth bearing in mind.

The Cardamon case also considered the appropriate measure of damages in circumstances where a buyer has made a good bargain, as explored in our article.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.