Category: Article

In an interview with Artificial, our Group COO, Nick Williams-Walker, explains why embracing digital capabilities is no longer an option but an imperative for brokers. He details our strategy of embedding AI along with smart placement and contract building into our workflows to become faster, more responsive, and to empower our colleagues to solve our clients’ most complex risk challenges:

For brokers at the beginning of their digitalisation journey, or early into it, what factors do they need to consider around their data capabilities?

If you look back to two years ago, you would probably say you needed to have your data in an incredibly structured format, and that you would need to spend 18 months in a dark room on data models before you could apply it to any tech.

That’s all changed now, and this is why I encourage people just to start; otherwise you could end up in the preparation phase forever. With our partnership with Google, we can now take unstructured data and get it into a usable state very quickly, but it’s still true that to make advances, brokers will have to get away from using just the Microsoft Office tool set.

A digital contract builder is the minimum a broker will need in the near future. There are many tools out there to digitise PDFs and documents, but that of itself won’t be enough to match appetite and trade quickly with carriers as they trade more algorithmically. Digitisation after the event isn’t sustainable.

In the London wholesale broking market in the near future, what capabilities around systems will become ‘table stakes’ to be competitive?

This isn’t groundbreaking, but in addition to a contract builder tool, it’s the ability to connect platforms together through APIs now, and probably agents in the future. That should be absolute table stakes today, but it’s amazing how much legacy technology in the London market still isn’t API-enabled. And then there’s different areas of the value chain.

The ability to trade and communicate with data, to receive and distribute data to clients and carriers – that should become table stakes very soon – but that’s just the front end of the business. There are other aspects just to maintain margin, and that means the transaction has got to be digitised.

To what extent can tech partners undertake a lot of the heavy lifting for brokers daunted by what transformation means for legacy systems, connectivity and data flows?

In previous years, everyone wanted the silver bullet of an amazing end-to-end policy admin system, but it never materialised. Hundreds of millions were spent trying to do it but in reality, it became back-office systems. Now firms like Artificial, are putting tools into the hands of brokers that support their activities in delivering great outcomes for clients, and interacting with markets.

The strategy at McGill and Partners is that we do not see any future with a single end-to-end policy admin system. We have strong partners like Artificial, who are providing everything around smart placement and contract building.

We also use Salesforce, for example, for everything related to clients, contracts and our sales pipeline, and then Google Cloud operates everything around our data. Because those platforms now have such great connectivity, you can easily plug in things like KYC and other elements to improve the client experience but also ensure operational efficiency savings. Brokers can now knit these things together in a fairly seamless way using tools like Mulesoft.

With just a few London brokers at the forefront of digitalisation, do you think these leaders will create a competitive dynamic that accelerates change?

There are economics in play, of winning more clients and operating more efficiently, and creating digitalised facilities, so there’s a revenue imperative which means that digitalisation will naturally become a competitive landscape.

It’s also about an employee proposition. People want to work in a place that’s moving forward, where they’re not going to be spending 80% of their time on the transaction. They want to solve difficult problems or claims for clients. Critically, that’s going to exert pressure on firms, in that talent is going to gravitate towards companies making the biggest strides in digital. We certainly see that happening already.

How will digital facilities like McGill and Partners’ Auton, shape the future client/broker/carrier dynamic?

Ultimately, it’s about matching risk to appetite in a much more algorithmic way. For our clients, it’s two things. One, it enables our brokers to spend more time with them, trying to solve the most complex problems, and then spend more time with the lead to craft solutions. We also see an increasing amount of pure follow being placed algorithmically, so we spend most of our time on lead line broking, and increasingly really complex risk.

The second point for clients, is that we can deliver great rated capacity for them much faster. It’s speed of placement, plus certainty of pricing and coverage for the client.

What are the different methods of measuring the impact that digitalisation delivers?

For us, there is a core measurement around capacity creation. It’s enabling us to grow our revenue and not have to grow our headcount at the same rate as we were at the beginning.

We’re also calculating how people spend that time that is freed up. We are already seeing that they’re spending far more time on the client solution piece. Through our partnership with Google Cloud, we use Agentspace which includes Notebook LM, Deep Research, our own form of ChatGPT, and the ability to create Agents. We’ve got an innovation studio and more than 20 AI-related programmes covering client solutions and operational efficiency.

The challenge for everyone is that, while capacity creation is great, what do people do with the additional time they now have available? You have to make sure that people are focusing on things that add value to clients, and to the firm.

These insights are part of a white paper, developed in collaboration with Artificial, on the future of our industry. To view the full whitepaper, please click here.

The UK just announced a landmark development that will reshape global risk management: the formal establishment of a new captive insurance and protected cell company regime. This isn’t just another policy update; it’s a monumental step that not only reinforces London’s standing as a financial hub but also strategically positions the UK to potentially become the world’s leading captive domicile over the next decade.

This new legislation is set to transform how many companies approach risk financing. It opens up fantastic opportunities for multinational and UK-based businesses, offering access to more extensive direct and reinsurance capacity than most other places. We’re talking about the potential for over 700 captive insurers, according to multiple reports, to form right here in the UK, or to move their existing operations from established domiciles. For many of our corporate clients, having a robust, onshore option with direct access to London’s incredible market simply makes sense.

What makes the UK so special?

It really comes down to London’s unique ecosystem. London has a powerful combination of talent, capacity and smart regulation that you won’t find anywhere else. It’s home to an experienced pool of insurance and reinsurance professionals, who can serve as independent directors for captives. Then there’s Lloyd’s of London, right on our doorstep, offering unmatched capacity and expertise. The sheer scale of direct and reinsurance capacity available in the ‘Square Mile’ alone is incredible, and Lloyd’s direct writing capabilities are a huge benefit for large multinational businesses.

Thinking about re-domiciling your captive to the UK?

This new regime also sparks a big question for many organisations: could moving your existing captive to the UK be your next strategic move? We’re expecting a lot of interest, especially from UK-based companies, but also from international clients. Consolidating governance, tax reporting and market access here in the UK could offer huge advantages. Plus, there’s a strong national security angle – bringing captives covering critical UK infrastructure onshore could improve oversight and safeguard sensitive information.

We will be doing a deep dive into the proposed new legislation to determine the optimal strategies for companies like yours to truly benefit from this. We are looking to confirm that the regulatory framework is both practical and financially sound for those considering a move to the UK from other locations.

This announcement is an exciting step forward, and we are ready to help you explore these new possibilities. Please don’t hesitate to reach out to our dedicated Captive team – Chris Sutton, Pete Chesman ACII, Graham McCarthy and Sean Walsh.

Written by

The impact of rights of light claims on development projects has been a concern for UK developers for several years now, but, until relatively recently, Ireland had managed to buck the trend.

However, as Ireland enjoys a period of heightened development, rights of light issues have become an increased topic of debate. Urban development is on the rise fuelled by a lack of housing in cities such as Dublin and Cork. The effects of Brexit are also being felt with a number of international companies relocating to Ireland as their European headquarters, increasing the demand for both office space and housing. Cities such as Dublin have proposed increasing their building height restriction to potentially 25 stories, to deal with this demand, which will only lead to further discussions around
rights of light.

So what is a right to light?

A right to light is an easement that gives a property owner the right to receive light through defined apertures in their building. Disputes can therefore arise when new developments threaten to obstruct this right.

A right to light in Ireland was initially established by the 1858 Prescription Act, the same act that is in effect in the UK today. However, this law was repealed by the 2009 Law Reform Act, which reduced the period of use and enjoyment needed to acquire a right through prescription from 20 to 12 years.

There have already been large losses for developers as a result of rights of light claims in Ireland. One of the most notable rights of light cases relates to the re-development of City Quay, Dublin where in 2018 the Immaculate Heart of Mary church adjoining the development was paid €3.5 million in compensation for their loss of light after objecting to the neighbouring development. The settlement included compensation and also an obligation to undertake improvement works on the exterior of the church.

High profile claims such as this with large losses for the developer has resulted in increasing awareness of rights of light in Ireland, something any developer operating in Ireland should be mindful of

How insurance can help

Rights of light insurance is taken out by the developer to mitigate the financial risk of a third party coming forward attempting to enforce their right to light.
Some of the typical losses covered by a policy include:

• Settlement costs to injured third parties, over and above any excess that might be in place.
• Legal and professional fees incurred defending a claim.
• Abortive costs and the cost of demolishing, altering or reconfiguring part or all of the property if required by a court order or settlement agreement, as well as any loss in market value.
• Delay costs and loss of rent (can also be included under the policy for an additional premium).

A rights of light insurance strategy consists of three different options of cover, which are outlined below. Generally,a strategy is made up of a combination of these three approaches depending on the level of injury caused by the development and the third parties involved.

• Wait and see – No contact is allowed with the injured properties and in the event an injured third party comes forward any settlement costs and professional fees will be borne by the insurer up to the limit of indemnity.
• Reactive agreed conduct – In the event an injured third party comes forward you can negotiate a settlement with this party within the excess defined in the policy. Legal and other professional fees will not reduce the excess, and these
• must be borne by the insured. You must not contact these parties with regards to rights of light.
• Proactive agreed conduct – The insured is expected to proactively negotiate a settlement with these third parties, within the policy excess. If the settlement exceeds the excess or there is an injunction the policy will then respond. Legal and other professional fees will not reduce the excess, and these must be borne by the insured.

Insurance is a solution that mitigates financial loss in the event of a claim, however, the only thing that can truly mitigate the risk including the time and stress involved; is releasing the issue with the third party. This is where the agreed conduct style of policy has become increasingly popular in the right to light market, especially where there are high levels of injuries to third party properties and it would not fit within good developer conduct to ignore the injured party. It is also used where there are good relationships between the third party and the developer or a mutual release is being sought. In these scenarios rights of light insurance provides “catastrophe” cover in the event that relations sour and a reasonable settlement cannot be agreed or injunction proceedings are commenced by the injured party.

Information Required

In order to look to obtain insurance the following will be required:

• A copy of the right to light report
• Copies of the title register and plans to the property
• Details of the development and confirmation of the planning status
• Details of any material objections or contact by third parties
• Details of any neighbourly matters that might be required – i.e. party wall agreements, crane over sail licences
• The GDV of the development
• The anticipated profit of the development – if known
• Details of any legal DD carried out of any of the neighbouring properties – if available

Rights of light insurance is a valuable tool for developers in Ireland, offering financial protection and legal support in the face of potential disputes arising from new developments. As urban landscapes evolve, understanding the impact of a right to light becomes increasingly important. Developers should carefully consider their options and consult with surveyors, legal and insurance professionals to ensure comprehensive coverage and protection of their development.

The McGill and Partners Legal Indemnity team have completed thousands of deals and have experience in the most complex of situations, creating new solutions in conjunction with developers and insurers.

“There’s been a lot of confusion and concern about new war clauses on cyber policies; while exclusions are never a cause for celebration, adding clarity to coverage can be. Long a murky topic, these changes may usher in a new understanding of the line between insurable and uninsurable risk in the current cyber market”

The line between insurable and uninsurable risk where conflict between sovereign states involves cyber-attacks has long been difficult to discern.  An important element of cyber coverage has been the agnostic approach to threat actors (including state sponsored/executed attacks), but combined with the war and terrorism exclusions in policies, questions remain as to when a cyber-attack becomes an act of war, and thereby uninsurable.  The recent War and Cyber Operation Exclusions introduced by the Lloyd’s Market Association (LMA) have been designed (with best intention) to better insulate the cyber market from specific systemic risk emanating from the use of cyber-attacks in the course of war/conflict.  War exclusions are commonplace in existing cyber policies (and have been for numerous years), but certain coverage conditions (i.e. carve backs for Cyber Terrorism) have long caused uncertainty as to what is an acceptable level of risk/impact the market can bear where there is far-reaching impact for state-sponsored cyber-attacks.

The LMA has introduced four versions of the War and Cyber Operations (LMA5564 – LMA5567) which will be mandated across any cyber policies written by a Lloyd’s syndicate from Apr 1 2023.  As should be expected with any new clause, there are various iterations in the market to further clarify position and ensure the language is fit for purpose (both for carriers and insureds alike) – but, there are common provisions across all versions for uniformity in position:

1.       War (whether declared or not) is excluded from coverage – this is a continuation of the existing coverage position: war is not an insurable risk in the cyber market.

2.       Exclude state-sponsored cyber-attacks that significantly impair (1) ability of state to function or (2) security capabilities of state (“impacted state”) – arguably, this is the delineation that has been missing in the cyber market; a more definitive response to “what constitutes uninsurable risk that may or may not be considered war?

3.       Clarity regarding coverage for computer systems located outside of an impacted state – serves to limit the exclusion to that which has been deemed uninsurable by virtue of the “war threshold” established above.  This provision is an important recognition that there may be other impacted organisations that exist outside of the intended targeted state.

4.       Robust basis for attribution agreement regarding state-backed cyber-attacks – This is a significant change to the functionality of cyber policies – up to now, the policies have been agnostic as to threat actor with coverage attaching whether the threat actor was state-sponsored or not, though it is important to note this position in the context of the war exclusion remained largely untested and confusing.  Attribution as an explicit coverage determinate is a new position and again seeks to create a clearer position on what constitutes uninsurable risk that may or may not be considered war.

It is important to note (1) this directive applies only to Lloyd’s of London Syndicates and (2) while markets must adhere to the provisions above (1-4), there is still flexibility for risk appetite and differentiation (for instance, allowing coverage for assets outside of the impacted state).  Though the directive does not extend to the full cyber market, it is a clear indication of the direction the market is moving and similar clauses should be expected in the broader marketplace.

As these clauses are the first iteration (and yet untested), challenges to the applicability of the exclusion in any given circumstance are very likely to occur. One such likely challenge will be proving attribution – attribution (and acceptance) can be very difficult and absolute certainty in attribution may not be feasible (especially based on public information that can be used as evidence).

While these terms may appear daunting, the goal is to provide additional clarity of coverage in a world that is increasingly reliant on technology.

McGill and Partners has been working closely with clients to help guide them through this first step  in what is likely to be a long road of policy language development, helping to provide more certainty of coverage where the exclusion is involved, ensuring cover under their programs is as broad as possible in the current market.

In a world that is increasingly more reliant on tech it can be hard to decipher whether a policy offer you the coverage you need. McGill and partners works closely with clients to help guide them through what is likely to be a long road of policy language development to ensure the coverage you need is the coverage you get, whether the exclusion is involved or not.

The simple, binary structure of the product enables capital providers to confirm pay-outs faster than traditional (re)insurance products.

Parametric (Re)insurance is an indexed based product that offers recoveries based upon pre-defined trigger events (peril, location and severity). We structure each contract on a bespoke basis to reflect the needs of our clients – we look to understand and mitigate the inherent basis risk in these products and believe they offer an attractive and complimentary alternative option to our clients. 

Parametric products are a powerful mechanism when fast and efficient recovery is needed or is preferable – the speed of pay out can mitigate or reduce loss development thereby having a positive effect for the insured. 

Capacity for structured products is flexible – meaningful limits are available to address the larger capacity challenges of our clients but also as the structuring costs are not onerous it can also be used to efficiently address smaller challenges.

The binary process, which provides clarity on loss and speed of payment, is very attractive to both insureds and cedents – certainty of position is attractive to both buyer and seller.

The parametric product creates certainty for the client and eliminates questions on whether certain assets or underlying coverages are within scope, something very topical during covid. Parametrics can often be structured and placed with minimal information and therefore underlying assets are not questioned.

For example, if a retail client suffered no Property Damage in an earthquake but suffered a Business Interruption loss due to closure of stores, the client could receive a pay-out if the severity of the earthquake was triggered.

We are currently working with clients on products that would recover in another Pandemic or suffer losses from ongoing global uncertainty.

In 2021, there were number of events including Winter Storm Uri, the European Floods and finally Hurricane Ida, which triggered more interest from clients, who sought more index-based products for Catastrophe perils. Technology Platforms and MGAs are focussed on live, as well as historical information, which is generating more robust data and enabling McGill and Partneto create more bespoke and effective structures to recommend to our clients.

New capital is also seeking more ways to get closer to the original risks and the product takes it either onto the Insurance programme or one step back via Reinsurance. Certain capital is seeking ESG focused products and as these programmes are aggregated and tailored to class and territory, the product can be tailored to the non-traditional carriers.

Our firm has established a core working group, encompassing colleagues from a multi-class background from our Insurance, Reinsurance and Capital Market teams. We have been working with both Insureds and Reinsureds, either securing single peril coverages on Insurance programmes, or designing bespoke Parametric coverage across Cedent portfolios.

We are perfectly positioned to advise on this product, as the firm works across a single P&L, providing access to clients and capacity across all teams. It enables a unique perspective on structuring, with full support from our Catastrophe and Actuarial modelling teams.

“Family first” a statement that is true for almost everyone, but something that isn’t always openly talked about or in fact encouraged within the business setting. Working long hours and often missing out on key moments in family life is commonplace when you’re constantly striving to achieve and obtain recognition in the workplace. Not, however at McGill and Partners.

I write this looking back at an unforgettable 6-month paternity leave. Six precious months spent with my new-born son Henry, 2-year-old daughter Elsie and wife Erin.

That time has allowed me to become an integral part of family life, strengthening the bond between my children and I at a critical stage in their development. The brain is the only organ not fully developed at birth and 90% of critical brain development happens in the first five years of life. Therefore, the McGill and Partners paternity leave policy has not only given me a wonderful experience and memories that I can cherish, but, quite literally, the opportunity to help create the foundations of a secure family setting that will have psychological benefits for my children for their lifetime.

Of course, those 6 months were not always easy; but it has allowed me to truly appreciate the challenges of full-time parenting. The meltdowns, the routines, the unachieved plans, the negotiations and, perhaps most of all, the patience. I have learnt a lot about myself, and it has helped me to develop various skills that will benefit every aspect of my life. Being a parent is one of the most challenging, yet rewarding jobs in the world, and I am grateful that I could be a constant part of it all during my paternity leave.

“In 2019 we established McGill and Partners with the remit to build a company that differentiates itself through its inclusive culture and leading-edge working practices, underpinned by our Contract of Trust. Our family friendly policies are an example of this, and we are delighted that so many of our colleagues, including Oliver and his family, have taken them up and enjoyed precious time with loved ones.  We are also proud of the fact that other companies in our sector are following our lead and introducing similar policies.”

Toby Sisson, Group Head of HR

It seems odd to me now, that this is time that we will never get to spend together again, building the foundation blocks for our family, but even odder that this extended period of paternity leave is not in any way common place within businesses in the UK. Having experienced it myself, all I can say now is that it really should be, and I hope that by sharing my experience it may spark a conversation in other UK businesses to perhaps consider doing the same.

It makes me very proud to be working for a company that understands the importance of family and unashamedly so. They understand that by giving us, their employees, time to enrich our family life, it not only benefits us, the employee, and our family, but it will also benefit the business in the long run, by facilitating a much healthier, happier and more productive workforce.

Thanks to McGill and Partners and my incredible team for making the last 6 months possible.

Economic crisis will not be a new experience for most companies and financial sponsors. Recent downturns have presented their own unique challenges. The speed and shock of the COVID-19 crisis has allowed little time to plan. With countries accounting for over 50% of the world GDP in lockdown and house-hold brands already filing for administration, McGill and Partners has been analysing how the M&A environment will be different once deal activity resumes. 

While the crisis has, understandably, relegated M&A as an immediate priority, the volatility that has caused financial difficulties for many may soon present an upside for those looking to acquire or invest in companies that were previously off the market and now in need of capital. Corporates looking to sell non-core assets to bolster cash reserves to weather the storm or indebted sellers looking to reduce debt burdens present some of the many attractive opportunities for buyers / investors in this downturn. 

At McGill and Partners, we have been advising clients on using warranty and indemnity insurance to de-risk liabilities acquired when buying or investing in distressed situations. There are many characteristics of a distressed sale process that impose limitations or present challenges; careful thought and planning are required to navigate them. Here are some of the considerations you may wish to give thought to if you are looking to obtain M&A insurance protection for your distressed transaction. 

Insurance solutions using synthetic warranties 

While a buyer can take advantage of a distressed situation to acquire a high-quality target at a lower price, it will often not be afforded the same contractual protections that it might otherwise receive in a non-distressed, private M&A transaction. Sometimes it may not be possible for a buyer to negotiate a meaningful set of warranties because the seller is unwilling or unable to give them (for example, if the seller or management team’s equity is underwater or will result in negligible proceeds or perhaps, in the case of an insolvency practitioner, reflecting the limitations on his or her ability to disclose against the warranties because he or she has not been involved in the historic management of the business). In each case, the seller is looking to achieve a sale for the best possible price while limiting their liability. In such scenarios, it may be possible to structure an insurance solution where a synthetic set of warranties is included within a W&I insurance policy that would give the buyer protection if a warranty is breached. The warranties are deemed to be synthetic as they are not given by the seller in the transaction documents but instead are negotiated between the buyer and the insurer and included solely in the W&I insurance policy. 

For these types of policies, careful consideration needs to be afforded to the drafting and breadth of the warranties given by the insurer. Unlike a typical private M&A process, a buyer’s access to management teams and the level of diligence they can practicably conduct may be significantly restricted in a distressed sale process. Accordingly, the suite of warranties an insurer would be willing to cover may be more limited to reflect the matters that could reasonably be the subject of diligence by a buyer and its advisers with minimal engagement from the seller or management. 

In addition to reviewing the diligence the buyer has already conducted, the insurer will prepare a targeted Q&A focussed around the scoping of the warranties in order to elicit information from the seller to give them comfort to provide cover. The collaboration between the buyer, seller / management and insurer during this broker-facilitated process is of importance in determining the breadth of warranty protection, as the insurer seeks to align the scoping of the warranties with the buyer’s due diligence and responses to its Q&A. Ensuring the insurer is comfortable with the quality of the diligence exercise and disclosure process is of particular importance as the insurer does not have a traditional right of subrogation against the seller in the event of fraudulent non-disclosure since the seller is not giving the warranties under the transaction documents. For these reasons, it is necessary to engage with the insurance workstream as early as possible to allow the insurer to provide direction on the buyer’s diligence scope to achieve a set of warranties that is sufficiently broad to suit the buyer’s aims. 

Valuation and loss recovery 

Maximising the proceeds from a sale is important irrespective of the nature of the sale, particularly where a seller urgently requires an injection of capital. Though for some distressed transactions, pressure from creditors, maturing debt and falling levels of liquidity (amongst other factors) might drive a sale that sees a trade-off between maximum return and speed of execution. Irrespective of whether the seller is willing to give warranties, or an insurer structures a synthetic policy, if warranty insurance protection is sought buyers should give particular attention to the target’s valuation and how this interacts with the quantification of loss that would be recoverable under the policy. 

As recently reaffirmed by the High Court,[1] the correct measure of damages when quantifying loss for a breach of warranty in the relevant transaction document is the diminution in the value of the purchased shares, such diminution calculated by reference to the actual value of the target deducted from its market value had the breached warranty been true. While the courts will often look to the purchase price to determine the “market” value,[2] if expert evidence supports the conclusion that the company was sold at an undervalue (or indeed an overvalue) then the court will take this into account when determining the fair market value of the company and, therefore, the diminution in the value of the shares arising from the breach of warranty. 

This approach was recently applied by the courts,[3] with the judge citing both the speed at which the sale was executed and the sellers’ desire to sell the company in the immediate future as factors contributing to their conclusion that the company was sold at an undervalue. It was also found that, had the sellers’ contractual cap on liability in the relevant transaction document not been limited to the purchase price, the total damages awarded would have been in excess of the purchase price. 

Buyers should carefully consider the policy drafting to ensure the loss they would be able to recover aligns with their expectations, having regard to the target’s valuation. This is of particular importance where distressed targets are being acquired for a nominal value and buyers will need to give thought to the valuation methodologies applied, as these are likely to form an important focus of an underwriter’s review. 

It is also common in distressed sales for management to be given equity in the new target structure, which sometimes may be disproportionately higher than a non-distressed transaction. Where the rolling management team acts as warrantors, insurers take caution that a valid claim against the policy may result in management indirectly benefiting from their own breach of warranty. Depending on the percentage equity the rolling management take in the target group, consideration should be given to the loss insurers are willing to indemnify both in terms of the proportion of loss and nature of the breach of warranty; for example, some insurers might only pay claims proportionate to the insured’s equity interest in the target group or may limit the portion that may be recovered for a fraudulent breach. 

Minority investments 

Businesses in financial difficulty looking for an injection of capital or those with healthy balance sheets looking for capital to be used to acquire struggling businesses to accelerate growth may present attractive opportunities for third-party investors to obtain a minority interest in companies at an attractive valuation or that might otherwise not have been seeking financial sponsorship. For these investments, minority investors may seek warranty protection from the target company or its management, but the reality of the commercial relationship between the investor and the warrantor(s) may make claiming against them impracticable (indeed, warrantors may cap their contractual liability at a nominal amount from the outset). Warranty and indemnity insurance is commonly used by investors in these scenarios to provide them with protection for a breach of the warranties they have been given. However, the practicalities of a minority investment will inform the structure of, and approach to, the insurance policy. 

Following a claim, insurers will typically require access to certain information in order to properly assess the merits or quantum of a claim or require the insured to take or omit to take certain actions (e.g. to mitigate losses). Similarly, insurers will expect, usually at their own expense, to be entitled to fully participate in the defence, negotiation and settlement of third-party claims and, in particular, require the insured not to settle or compromise any third-party claims without the insurer’s prior written consent. In each case, a material failure to comply with these policy requirements is likely to prejudice the insured’s rights of recovery. Policyholders need to ensure that the drafting of these provisions has regard to the minority investor’s influence and reflect the contractual rights (either to information or participation) that the minority investor has to facilitate the insurer’s involvement in the claim. 

As is commonplace in a warranty and indemnity insurance policy, insurers will waive all rights of subrogation against the warrantor save in the case of fraud. Dependent on the investment structure and level at which a minority investor invests, and assuming a target company gives the warranties, if the investor has a direct or indirect financial interest in that entity (e.g. because the vehicle through which the investment is made becomes the parent entity), the insurer’s subrogation rights need to be more closely considered. While the insurer agrees to indemnify the investor for an insured loss, if that loss arose from a warrantor’s fraudulent breach of warranty the insurer’s rights of subrogation could permit recovery of the loss amount from the warrantor. Thus, the investor’s financial interest in the warrantor would indirectly cause them to suffer a financial loss at a subsidiary level. Investors should make sure that insurers narrow their subrogation rights further to limit this application. 

The bolder your ambition, the better we become 

Combining true expertise with a fresh perspective to deliver market defining risk solutions, our experienced M&A team is committed to helping clients to navigate the current uncertainty and to capitalise on the opportunities presented. There are many other creative bespoke solutions our M&A team has developed to address deal issues, each tailored to the situation and the needs and objectives of the client.

If you would like more information on the solutions outlined, or to find out if we can use our expertise and creativity to help you to resolve any other deal issue, please contact: 

James Swan | james.swan@mcgillpartners.com 

_____

[1] Oversea-Chinese Banking Corp Ltd v ING Bank NV (2019). 
[2] See Triumph Controls UK Ltd & Anor v Primus International Holding Co & Ors (2019). 
[3] Cardamon Ltd v Macalister & Anor (2019).