b'Mergers & Acquisitions | Transactional Liability InsuranceRESPONSIBILITY FOR BROKERAGE FEES WARRANTIES RELATING TOOn a number of occasions, we have seen instancesANSWERS TO QUERIESof M&A brokers pursuing target companies forIncreasingly, we have seen warranties being brokerages and similar fees after the conclusion ofincluded in SPAs that relate to the accuracy of the the transaction, which insureds have looked to thesellers answers to the Insureds queries during the W&I policy to recover. Whilst specific warrantiesM&A process. Whilst wordings vary, these warran-relating to brokerages are typically carved out fromties typically relate to responses to the sellers the scope of cover via the warranty spreadsheet,queries that are provided in writing. However, this insureds have successfully been able to bring claimscan result in ambiguity as to the scope of what is under the broader financial statements warrantiesbeing warranted. It seems to us that this ought and warranties relating to the targets liabilities.strictly to be the factual content of the written response; however, insureds may seek to advance a In order for insurers to eliminate the risk of beingcase that the warranty is also warranting the accu-exposed to these types of costs, which rightly sitracy of attachments or documents referred to in with the seller, insurers ought to use specific exclu- the written response. sions which apply across all of the warranties, rather than simply carving out the specific warranty fromWhere underwriters see these sorts of warranties, the scope of cover. However, it is becoming increas- we suggest that they seek further clarity as to the ingly difficult for underwriters to negotiateQ&A process that has been undertaken, including, exclusions in great number or of great breadth, sowhere possible, by undertaking a review of the this may not be feasible in the current climate. Asanswers that have been warranted in order to such, we would recommend that underwriters raiseunderstand the scope of what is included. Of specific queries of insureds about brokerage feesparticular concern is where responses attach or and the diligence that has been carried out in thatrefer to larger documents prepared by the sellers regard, in order to identify and mitigate this risk.advisors, which insurers will not wish to cover the accuracy of. Insureds may even use these warran-WORK IN PROGRESS ties to argue that financial statements have been Historically, W&I underwriters have been unpreparedwarranted to a higher standard than the audit to provide cover to insureds for the targets accountsstandard if they are attached to or referred to in an receivable. However, where the target company is aanswer that is within the scope of the warranty. provider of services, underwriters will not typicallyWhere there is ambiguity as to what will comprise exclude the risk of work in progress (WIP), beingthe warranted response, and the scope of what unpaid or written off. As a result, we have seen amight be considered to be the response is some-number of instances where significant claims havething that potentially high risk, this can be arisen relating to WIP write-offs.resolved via the warranty spreadsheet where this is commercially achievable. gFor providers of services, a significant amount of the balance sheet value of the company will be in its WIP. As such, it is likely not feasible to exclude cover for losses relating to WIP from the scope of cover of the W&I policy, so we suggest the underwriters pay particular attention to the diligence that has been undertaken around the accounting for WIP, including the quality of earnings analysis. 34 GLOBAL INSURANCE INDUSTRY|YEAR IN REVIEW 2020'