Key insight into claim on Warranty & Indemnity insurance

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This article was written by Justin McDonnell and Rebecca LeBherz.

The Supreme Court of Victoria has considered whether an insured buyer under a warranty and indemnity (W&I) policy is entitled to indemnity from an insurer in circumstances where it relied on income and liability warranties in a share sale agreement and those warranties were breached. W&I policies are rarely considered by Australian courts. This case provides welcome guidance on the contractual interpretation of W&I policies for lawyers, insurance professionals and businesses relying on W&I policies.

The facts before the court were cause for examination of common W&I issues including breach of warranty, whether an estoppel will arise in favour of an insured where the parties to a contract have previously participated in an ADR process, quantification of loss for warranty breaches and interest under s57 of the Insurance Contracts Act 1984.

Key take-aways:

  • An arbitral award between parties to a sale agreement will not create an estoppel in favour of an insured against an insurer, even where related issues are considered. That said, a contractual dispute resolution process between buyer and seller is not redundant - the court relied on much of the evidence of the arbitration, resulting in significant efficiencies in the evidence process.
  • One of the most common questions we are asked is "How do I limit seller liability without voiding the W&I liability trigger?". Unfortunately, the court did not take the opportunity to examine in any detail the drafting of the W&I clause in the sale agreement. However, based on the conclusion reached, this case can be interpreted as an approval of the "saving provision" approach where liability is limited, save to the extent required in order to claim on the W&I policy. The clause considered with approval by the court in this case is set out in the judgment at [48].
    • Courts are willing to award significant interest amounts where an insurer has delayed indemnification. The court provided useful guidance on what is a "reasonable" date for indemnity under section 57 of the Insurance Contracts Act, after which interest will accrue.


    In 2013, the Plaintiff, UDP Holdings Pty Ltd (the Insured) entered a sale agreement to purchase all shares in a large food catering company (the Company) from Esposito Holdings (the Seller). The sale agreement contained a number of warranties including that financial accounts uploaded to a data room represented a true and fair view of the Company's financial affairs. The Insured placed a buy side W&I policy (the Policy) underwritten by the defendant Insurer in this case, Ironshore (the Insurer). The Policy covered breach of the contractual warranties provided by the Seller.

    The Seller breached some of the contractual warranties and the dispute as between the Insured and the Seller was referred to arbitration pursuant to the dispute resolution clause in the sale agreement. As the Seller did not satisfy the award (it was itself subject to insolvency proceedings shortly afterwards), the Insured ultimately sought indemnity from the Insurer under the Policy. Indemnity was refused. 

    The warranties considered related to the Company's largest contract for the supply of dairy products to the Lion Nathan Group. The Seller warranted the accuracy of financial records, which included the Lion contact. Shortly after completion, Lion advised the Insured that the Seller had in fact overcharged Lion by $9.3 million under the contract. The Company's financial position was much worse that the financial accounts showed. Profits has been inflated and business sustainability exaggerated. The Insured reached a settlement with Lion for the overcharging. In November 2014, a secured creditor appointed receivers and managers to the Company. The Insured argued that it relied on the warranties as to financial position and had it been aware of the Lion overcharging, it would have not entered the sale agreement. The fact that the Seller had breached the sale agreement was not disputed in the proceedings.

    Issues before the court

    The Insured claimed that:

    • The arbitral award made in its favour against the Seller for breach of warranties established that it had suffered loss for the purpose of the Policy, for which it was entitled to be indemnified;
    • The Insurer should be estopped from contesting or denying the facts underpinning the arbitral award;
    • Indemnity should be granted under the W&I policy; and
    • It was entitled to the costs of the arbitration and interest.



    As mentioned above, prior to the proceedings coming before the court, the matter as between the Insured and the Seller was referred to arbitration. The arbitral tribunal found that the relevant warranties had been breached, but for the breach, the sale agreement would not have completed and that the Company had suffered a quantified loss. The Seller did not pay (as it was itself subject to insolvency proceedings), so the Insured sought to claim on the Policy (noting the Policy limit of $25 million).

    The court considered whether the Insurer was estopped from denying the arbitral award in the Insured's favour and found that it would be unjust if the Insurer was denied the right to defend the Insured's claim on account of arbitral award against the Seller on different (albeit related) issues. The arbitration did not consider the Policy (only the sale agreement) and the Insurer was not a party to the arbitration. The court found it was necessary to consider loss and liability under the Policy. The court declined to make a finding of an estoppel.

    That said, the contractual dispute resolution process between buyer and seller was not redundant in light of the seller's insolvency - the court relied on much of the evidence of the arbitration as applicable to the issues between the Insured and Insurer, resulting in significant efficiencies in the evidence process. The court took the benefit of 7000+ pages of evidence and the arbitral tribunal's findings on breach of warranty – which were not disputed by the parties.

    The Insurer's liability for breach of warranty and quantification of loss

    To determine the Insurer's liability, the court had to consider whether the Insured was contractually entitled to recover against the Seller for the breach of warranty, as that was the trigger for indemnity under the policy. This raised an issue which lawyers often see when drafting a sale agreement – how to limit the liability of the seller while preserving the liability trigger of the W&I policy. Interestingly, the court did not perform an analysis of the saving provision[1], but given the ultimate findings, we have to assume that the clause as drafted[2] did not frustrate the liability trigger.

    As to quantification, expert witnesses for each party adopted different methodologies for quantifying the loss both on valuing the amount of the Lion overcharges, valuing shares in the company and valuing the Insured's loss. The reader may be interested in the court's consideration of common valuation methods at [149] to [279]. However, the methodology consideration was ultimately moot in this case as all valuation methodologies concluded loss in excess of the Policy limit.  The court relied on the principles of the High Court's decision in HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd[3], that is, by determining the difference between the price paid and the fair or real value of the assets acquired at the date of purchase.

    The court also considered, as a matter of policy construction, whether the Insurer was required to make any payment while it remained open that some amount may be recovered by the Insured (via the ongoing liquidation of the Seller or otherwise) i.e. has "Loss" under the Policy occurred where the amount remains uncertain. The Insurer argued in the negative, which was rejected by the court, who offered some useful comments on the point:

    • "The scheme of the policy is for the insured to have prompt recourse through the claims handling procedures…The underwriters' obligation to indemnify is not dependant on the prior collection of all Recovered Amounts";[1]
    • "The Policy should be given a businesslike interpretation having recourse to the commercial purpose or objects to be served… It is obvious that the recovery process is often beset with obstacles and hazards such as insolvency, the need for tracing (etc.)";[2] and
    • "Should it be necessary, the Court can require undertakings from the receivers and managers of [the Insured] concerning the Recovered Amounts."[3]

    Costs of the arbitration

    Rather than a claim for "Defence Costs" under the Policy, the Insured ran the more novel argument that it was entitled to an award of its costs incurred in the arbitration on the basis that the Insurer had breached it duty of good faith as contemplated by the Insurance Contracts Act 1984 (Cth) (ICA) in failing to indemnify and obtaining a stay of the proceedings until the arbitration was completed. No "Defence Costs" were claimed under the Policy, presumably because even if successful, the cost inclusive Policy limit was already exhausted. Had this not been the case, it possible the Insured would have been successful in a claim for "Defence Costs" under the Policy.

    The court considered the Insurer's ICA good faith duty and declined to award the costs on account of a breach of the Insurer's duty of good faith as there was no dishonesty by the Insurer, absence of commercial standards of decency and fairness, failure to have due regard to the interests of the insured or lack of competence or failure to respond. The underwriters were not parties to the arbitration and were not responsible for the delays in the conduct of the arbitration caused by the unexpected difficulties that transpired.[4]


    The court also considered whether to award interest. This involved a useful analysis of section 57 of the ICA which contemplates the payment of interest from the date where it is no longer reasonable for the Insurer to have withheld indemnity. During the stay application in this case, Senior Counsel for the Insurer made comments to the effect that the Insured was protected by statutory interest, and this seems to have been given some weight by the court, who referred to the transcript of the application hearing in the judgment. In addition, the court considered the advance notification of the claim in 2015 and the reports and loss assessment completed as early as May 2015. It was held that it was unreasonable of the Insurer to have withheld payment on and from September 2015, being four months after the claim was made, 10 weeks after the Insured had submitted its response to requests for documents and 6 months after the claim was notified.

    Held: Judgment in favour of the Insured in the amount of $25 million (the limit of liability under the Policy) plus section 57 interest.

    The full text of the case is available here.

    [1] "17.2(c) For the avoidance of doubt, the release and other provisions in clause 17.2 do not prevent the Buyer from making a claim under the Warranty and Indemnity Insurance Policy and notifying the Seller of this claim provided the Buyer's claim is made strictly on the basis that the Seller has no liability whatsoever in relation to the Buyer's claim except as set out in clause 7.2(b)".

    [2] See [48].

    [3] (2004) 217 CLR 640.

    [4] At [337].

    [5] At [339].

    [6] At [342].

    [7] See [376]-[379].

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