7th Circuit May Clarify Rep & Warranty Insurer Duties

May 16, 2017 - Over the last five years, the representation and warranty insurance (RWI) market has experienced dramatic growth. As one would expect, such growth has brought with it an increase in reported claims. That said, disputes between RWI policyholders and insurers usually avoid the courts, as most policies include mandatory arbitration provisions. Because alternative dispute resolution is the go-to for RWI disputes, few precedential court rulings occur in the field. When a precedential ruling does arise, it is usually closely watched.

That is the case for Ratajczak v. Beazley Solutions Ltd., a RWI dispute that addresses the scope of an RWI insurer’s duties to its policyholder, particularly in the context of settlement of an underlying claim. Butler Rubin attorneys Jason Dubner and Mark Schwartz recently authored an article about the case for Law360 . The piece summarizes the facts of the matter, the initial decision of the lower court and the potential implications of the pending appeal.

The matter arose in May 2012 when the Ratajczaks (the “sellers”) sold their whey product manufacturing company to an affiliate of Granite Creek Partners (the “buyer”) pursuant to the terms of a stock purchase agreement. In connection with the transaction, the sellers purchased a sell-side warranty and indemnity insurance policy (the “RWI policy”) from Beazley Solutions Limited.

The RWI policy that the Ratajczaks purchased insured them against “loss” in excess of an aggregate $1.5 million retention, up to an aggregate $10 million limit of liability. The RWI policy defined “loss” as “actual damages, including without limitation diminution in value, which the Insured is contractually obligated to pay as the result of a Breach or Third Party Demand and any Defense Costs arising from a Breach or Third Party Demand, in accordance with the [SPA].” Per the RWI policy, Beazley was required to indemnify the sellers for any damages they could become obligated to pay as a result of a breach or third-party demand, provided the sellers gave the insurer notice of that breach or third-party demand “as soon as reasonably practicable.” The RWI policy also contained a “consent to settle” provision, which stated that the Ratajczaks could not settle any breach or third-party demand “without prior consultation with and the prior written consent of” Beazley.

Conflict arose in November 2012 when the buyer accused the Ratajczaks of fraud and breach of various warranties contained in the SPA. Following a December 2012 in-person meeting between representatives of the buyer and sellers, the buyer sent the sellers a copy of a draft complaint that the buyer had prepared, which specified the warranties in the SPA that the buyer believed had been breached as well as a draft settlement agreement. Shortly thereafter, the Ratajczaks sent back to the buyer a revised draft settlement agreement.

To jump to the crux of the issue, Beazley refused to indemnify the Ratajczaks for their settlement with the buyer, so the Ratajczaks filed a federal court action in Wisconsin against Beazley and included allegations of bad faith and breach of the insurer’s duty to indemnify. The case is currently on appeal, and the outcome could impact RWI policies and insurers with regard to their duties to the policyholder in the context of settling underlying claims. Policyholders, in turn, could gain a better understanding of their duties to seek insurer consent to settlements and the scope of coverage for breaches of warranty in RWI policies.