Global M&A claims surge despite smaller deal volume: Report

In 2022, the largest claims still originate from accounting and financial issues.

The global representation & warranty (R&W) notification count increased in 2022 but has declined in 2023 year-to-date, according to a report by Liberty Global Transaction Solutions (GTS), a division of Liberty Mutual Insurance.

This reflects the surge in the number of risks insured at the end of 2020 and throughout 2021 due to record deal activity. However, the drop in deal flow over the last 18 months is leading to fewer claims.

Early indications show that notification frequency has increased slightly on the 2021 Year of Account (YOA) after dropping in the 2020 YOA.

More R&W notifications are being made more than two years after the policy's inception.

There is an increase in R&W notifications involving multiple issues being made just before the general warranty period expires.

R&W notifications where the potential loss exceeds the retention have decreased, but this is expected to be short-lived given recent pressure on retentions. 

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The report also examined the most common causes of claims, revealing interesting trends.

Tax-related issues continue to account for a significant number of notifications, comprising 28% of notifications in 2022 (up from 21% in 2021). 

This is in response to increased government efforts to boost tax revenues to fund COVID-19-related measures.

The largest claims still originate from accounting and financial issues, making up 12% of notifications in 2022 (up from 9% in 2021). 

These claims often involve substantial amounts and represented 28% of claims exceeding $1m in the past 18 months, the highest among all breach types.

Claims related to intellectual property issues, particularly trade secret theft and IP infringement, are on the rise, accounting for 9% of notifications in 2022 (up from 6% in 2021). These are most common in the IT, pharma, and consumer products sectors.

There has been a noticeable increase in R&W claims involving the condition of asset issues over the last 12 months.

An increase in notifications involving third-party claims is placing M&A insurers at higher exposure to defence cost expenditures, exacerbated by the current inflationary environment.