Representations and warranties claims activity remains strong – report

Despite market uncertainty last year, claims activity on representations and warranties policies never truly slowed, according to a new report from Aon’s M&A and Transaction Solutions team.

Aon saw a 23.5% increase in the number of claims filed in 2020 compared to 2019, the report found. That’s consistent with the growth of the number of representations and warranties policies placed by Aon in 2018 and 2019. Last year, overall claim frequency remained on pace with prior years.

“While this meant that insurers and their advisors were busier than ever, for most of the year Aon did not see a significant change in the claim process with respect to the investigation and analysis of claims, or the willingness of insurance carriers to pay claims,” Aon said.

However, toward the end of the year, Aon did note a shift in the approach taken by insurers and their consultants in validating representations and warranties claims. Insurers took more time to verify claim details and applied greater scrutiny around loss calculation, the report found.

“That said, despite the challenges that 2020 presented to the representations and warranties market, Aon continued to see many claims reach a successful resolution and result in fair claim payments,” Aon said.

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“It is not clear that we can attribute the volume and size of claims that we have seen in 2020 to the pandemic, although it may have played an indirect role in the amount of loss that insureds experiences,” said Jennifer Drake, senior vice president for Transaction Solutions at Aon. “The increase in the volume and limits of policies placed in the last several years is the simple and most likely cause of a corresponding number in the size of representations and warranties claims.”

Additional findings of the report include:

• As of the end of 2020, representations and warranties insurers had paid more than $500 million to Aon clients in North America since 2013, with nearly $375 million of that amount being paid in 2019 and 2020.
• 28% of tax policies placed between 2013 and 2020 had a pre-claim notice of a general lawsuit submitted by the policyholder. Notice of a formal claim was submitted on 7% of policies.
• Insurers reported paying 76% of representations and warranties claims on policies between 2013 and 2020 on a dollar-for-dollar basis, while 24% were paid based on applying a multiple to damages. Half of insurers surveyed by Aon believe that recent years have seen a rise in the number of claims seeking multiplied damages.