Warranty & Indemnity Insurance in the High Court

Mr Justice Popplewell’s decision in Ageas (UK) Ltd v Kwik-Fit (UK) Ltd seems to be the first decision in the High Court on Warranty & Indemnity (W&I) insurance although, by the time the case reached trial, any issues over coverage had been resolved and the only issue concerned the proper level of damages for breach of the warranties in the share purchase agreement (SPA). 

The Transaction

• Ageas purchased the share capital of a subsidiary of Kwik-Fit (automotive repair company) which provided insurance broking services.
• In the SPA, Kwik-Fit warranted the accuracy of the subsidiary’s accounts subject to a £5 million limit of liability.
• Aegeas had taken out “buyer side” W&I insurance with AIG in excess of that limit.

The Insurance

• Kwik-Fit had breached its warranty relating to the subsidiary’s accounts. They failed to take proper account of “Time on Cover Bad Debt” (TOCBD) which depressed the assets and revenue of the subsidiary.
• Ageas argued that the damages should be assessed at the date of the execution of the SPA in 2010.
• AIG argued that the damages should take account of the actual losses suffered by the subsidiary in the years after 2010 and which gave rise to much lower losses.
• In the years after 2010 the impact of TOCBD on the subsidiary’s accounts had in fact been much less than would have been anticipated in 2010 and Ageas asserted that its losses were £17.635 million thereby giving rise to a claim under the W&I policy of £12.635 million. AIG asserted the loss was only £8.792 million giving rise to a claim of only £3.792 million.
• By the time the case reached trial, Ageas had compromised its claim against Kwik-Fit within the limit of its retained liability of £5 million and AIG had admitted liability under its W&I policy leaving only the assessment of loss (the issue above) in dispute.

The Decision

• The measure of loss for breach of a warranty in an SPA is the difference between the value of the shares as warranted and their true value.
• The normal approach is to assess that loss at the date of the breach and on the basis of the information available to the parties at the date of the SPA (here, in 2010). However, AIG argued that subsequent events showed the impact of TOCBD after 2010 had been much less than would have been anticipated in 2010 and that should be taken into account in assessing Ageas’ loss (which has some support in case law). It will also be familiar to practitioners who have dealt with professional indemnity “loss of chance” claims and depends on some of the same cases (eg, Whitehead v Searle (2009)).
• Popplewell J was prepared to accept that when assessing damages which depend on a future contingency, account can be taken of the outcome of that contingency after the valuation date. However, he went on to make two qualifications:

1. This approach can only be justified where it is necessary to give effect to the overriding compensatory principle; and
2.  “… it is necessary to keep firmly in mind any contractual allocation of the risk made by the parties.”

• In this case, and on Popplewell J’s construction of the SPA, the bargain embodied in the SPA allocated to Ageas any benefit or loss arising from the way in which Ageas ran the subsidiary’s business or as a result of external influences after completion in 2010. The main reason leading to this conclusion was that the SPA was a fixed price agreement with no provision for alteration of the consideration in the light of post-completion trading and the incidence of TOCBD was “part and parcel” of the way Ageas chose to run the business after completion.
• Accordingly, damages were awarded on the significantly higher basis contended for by Ageas.

 The Significance

• The decision highlights the need for those negotiating and drafting SPA’s (and W&I insurers providing this insurance) to consider the apportionment of risk after completion.
• In reality, anticipating risks which have not been foreseen in the negotiation of the SPA and determining how they are to be apportioned to the parties present problems.
• In this case, the apportionment of risks to Ageas operated to its advantage but obviously that would not have been the case if the post-completion incidence of TOCBD had been worse rather than better than could have been anticipated in 2010.
• It is, however, an issue that should be borne in mind by practitioners negotiating SPAs in the light of the structure of the transaction.