On Jan. 15, 2021, a New York state court judge issued an opinion denying an insurer’s motion to dismiss a claim for coverage under a representations and warranties insurance (RWI) policy in WPP Group USA, Inc. v. RB/TDM Investors, LLC et al. More specifically, the court rejected the insurer’s argument that the claim was subject to certain exclusions under the policy and ordered the parties to proceed with discovery.
The court’s decision is interesting in several respects — not the least of which is that judicial opinions relating to RWI policies are quite rare. RWI policies are generally purchased by transactional buyers seeking to guard against misrepresentations made by sellers during the acquisition process without having to seek recourse against the sellers themselves for any potential losses. Typically, these policies provide that any disputes concerning an insurer’s coverage or payment obligations are to be resolved in confidential arbitration proceedings that do not generate public opinions. The RWI policy at issue in WPP Group, however, provided the insured with the option of bringing claims regarding the policy in either confidential arbitration or in New York state or federal courts.
The insured chose to litigate its dispute in New York state court and thus provided a window into a type of dispute not often fought in public. The court’s finding that the exclusions at the heart of the insurer’s motion to dismiss are ambiguous means the parties could face protracted and expensive discovery before this case is resolved. It also means there may be more opportunities for the court to issue public opinions interpreting this particular RWI policy.
The WPP Group case highlights a host of considerations for insureds who have the option of deciding between arbitration and litigation. First, where there is a threshold dispute as to whether a claim is covered under the terms of a RWI policy, insureds should strongly consider opting for litigation, as judges in state and federal courts tend to be more favorable in determining that claims are covered. Moreover, disputes concerning coverage itself inherently require a wider scope of discovery than those that involve only damages issues, and insureds can avail themselves of the broader discovery mechanisms available in litigation.
Conversely, where there is a dispute only as to the amount a policyholder may recover under an RWI policy, insureds should strongly consider arbitration. In this scenario, a policyholder can utilize the speed and cost-effectiveness of arbitration, where discovery is more limited, compared to traditional litigation, and therefore does not require the same lengthy process before obtaining a judgment.
As evidenced by the WPP Group litigation, insureds wishing to keep the details of any dispute and underlying transaction confidential will likely favor arbitration, as it provides privacy protections not available in litigation. In addition to the very real possibility that the transaction documents and their terms will be publicly disclosed (as in WPP Group), insureds pursuing claims against insurers should consider the significant value of keeping private a dispute involving sellers who may be partners in a new company resulting from the acquisition, as well as the ability to recruit and retain qualified leadership without being subject to an intrusive discovery process. By maintaining the confidentiality of a dispute in arbitration, a buyer seeking to enforce an RWI policy will be better able protect its image — as appearing especially litigious may discourage later sellers from transacting with certain buyers in the future. Buyers may also be at a disadvantage when negotiating future acquisitions if counterparties are able to scour public dockets for the terms of their prior deals.
For these reasons, it is important for insureds to consider more than their personal preference when deciding whether to elect litigation or arbitration as a means of resolving disputes with their insurers. Buyers purchasing representations and warranties insurance policies should pay close attention to dispute resolution provisions when negotiating their policies, carefully considering the risks and benefits of the two types of proceedings.
By Stephen G. Foresta, Aaron F. Jaroff, Ann T. Dorsett and Lee K. Royster