Policyholders Need Not Fear Alternative Dispute Resolution

Representations and warranties insurance (RWI) policies insure loss arising out of the seller’s breach of a covered representation and warranty in the purchase agreement. They typically provide coverage for amounts by which the buyer overpaid for the acquired company as a result of a breach of a representation or warranty in the purchase agreement, and for potential liability to third parties arising out of a breach, such as through litigation or even a government investigation. Most RWI policies are heavily negotiated agreements between sophisticated parties: the purchaser of a target company and the insurance company. Among the provisions that RWI policyholders should carefully scrutinize and negotiate with a clear sense of their needs and potential pitfalls are the mandatory alternative dispute (ADR) provisions in their policies.

Because most RWI policies recognize that the prompt payment of claims and resolution of coverage disputes is integral to the agreement, the policies usually contain ADR provisions, which govern how the parties are to resolve any dispute over an insurance claim. There’s a downside to binding arbitration for policyholders, in that arbitrators may be loath to award policyholders extra-contractual, punitive, or multiple damages, based on claims of bad faith. But ADR is not disadvantageous to policyholders in all respects. Because insurance companies are unlikely to agree to remove binding ADR provisions entirely, policyholders should be aware of the potential upside to ADR and work to remove any terms that may tilt the field toward insurance companies. Understanding the nuances of ADR provisions is increasingly important now, as insurance claims and disputes, which are traditionally thought to be countercyclical, are expected to increase as the economy tightens.

Among its advantages, ADR offers a confidential means of resolving disputes involving highly sensitive business information. It usually is faster than litigation for resolving a dispute. ADR also allows the parties to select who will decide their dispute. And some forms of ADR, such as mediation, can provide very efficient and cost-effective means of resolving a dispute without the need for arbitration or litigation.
 

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Carrie Maylor DiCanio is the managing shareholder of Anderson Kill’s Denver office and a shareholder in the firm’s New York office.