Interpreting what an insurance policy covers: the English courts' approach

Purchasers invariably seek to include warranties and indemnities (W&I) insurance policy in their share or asset purchase agreements. These are intended to give purchasers enhanced protection should statements made about the target business by the sellers turn out to be incorrect or the business faces liability to third parties after the purchase and that accrued before that date.

W&I insurance policies can be bought by the sellers but are more commonly brought by purchasers. Traditional W&I cover typically follows the terms of the purchase agreement, though additional "synthetic" W&I cover can go further and fill the gap between the warranties and indemnities which a purchaser would like to see included and those which could be negotiated. They allow purchasers to bring claims against insurers in respect of insured warranties, rather than try to pursue the sellers in the event that a warranty is breached.

Specific wording

The share purchase agreement (SPA) entered into by the purchaser in Project Angel Bidco Ltd v Axis Managing Agency Ltd & Ors. included a warranty that neither the company nor the sellers were aware of any bribery or corruption at the company.

Allegations of bribery were made against the company after the purchase, as a result of which business was lost from an important customer. The purchasers, therefore, sought to claim under a W&I insurance policy taken out with the defendant insurers.

The policy provided cover for breaches of all the warranties in the SPA but also included the following exclusion for "ABC liability": "any liability or actual or alleged non-compliance by any member of the Target Group …in respect of Anti-Bribery and Anti-Corruption Laws".

The purchaser argued that this clause contained an error and that "any liability or actual…" should have read "any liability for actual…." Accordingly, it argued that alleged breaches, for which the target company had not been found liable, were not excluded under the policy.

Interpreting policies

The general rule is that insurance policies are interpreted in the same way as any other contract. So, the courts will look at the "natural and ordinary meaning" of the relevant clause but might depart from that if it is clear that something in the drafting went wrong and the words do not reflect the true intentions of the parties (assessed objectively).

Insurance policy exclusions must be read in the context of the policy as a whole. A literal meaning can be corrected if it is clear both that a mistake has been made and what the clause should have said instead.

When interpreting insurance policies, Lord Hamblen provided useful guidance in FCA v Arch Insurance [2021] that: "In the case of an insurance policy of the present kind, sold principally to SMEs, the person to whom the document should be taken to be addressed is not a pedantic lawyer who will subject the entire policy wording to a minute textual analysis …. It is an ordinary policyholder who, on entering into the contract, is taken to have read through the policy conscientiously in order to understand what cover they were getting."

The Project Angel Bidco approach applied

Applying the general approach, the judge rejected the purchaser's arguments. The clause, as written, was not "inherently absurd" in the absence of the proposed change of "or" to "for". The clause catered for loss suffered either directly by the purchaser or as a result of the company having to pay a third party.  

By contrast, the court found the purchaser's interpretation would have led to an absurd result, because no relevant obligation could arise as a result of an alleged, as opposed to actual, non-compliance as "…by definition there can be no liability to make good an alleged as opposed to an actual breach". The defendants were correct to argue that "alleged" had been included here to cover the situation where insurers wish to pay a third party for a disputed breach, without making any admission or waiting for a court judgment to decide actual liability.

Osborne Clarke comment

This case demonstrates the need for careful legal consideration of proposed insurance terms, at the date of purchase, in order to ensure that the cover being bought is that which is required by the policyholder.

While the courts will in some cases depart from the literal wording of the policy to give effect to the commercial intention of the parties, the case is a reminder that compelling evidence is required before a court will be willing to do so.

There have been relatively few reported cases regarding W&I coverage until this case and (a case in which insurers successfully argued that there was no causal connection between the warranty that was allegedly breached and the "warranty true" price paid by the purchase, and no actual breach of the underlying warranty). 

The fact that both claims were unsuccessful does not undermine the value of W&I insurance. However, for policyholders they underline the importance of carefully ensuring that the policy meets their requirements and the importance of a careful consideration of the policy coverage and claims preparation before advancing claims under W&I policies, given insurers willingness to scrutinise and challenge claims.