Chapter 3: North America: Breach Type and Notification

Key Takeaway: We are starting to see some changes in the representations that are cited most frequently. Notably, compliance with laws and tax breaches have become more prevalent; however, the main drivers of loss remain financial statements and material contracts.

Figure 8 shows the frequency with which R&W breaches were cited on policies placed since 2019, as well as the losses attributable to each breach type. Compliance with laws is still the most frequent breach type at 20%, followed by tax, which jumped up to 17%, and financial statements and material contracts at 13%. Notably, product liability is becoming a more severe breach type, with an outsized percentage of total loss compared with its frequency.

While interim breaches still occur less frequently, we have seen a number of notifications this year submitted on Aon’s proprietary IBEX insurance policy. The large majority of these claims are still active and have not yet resulted in a resolution.

One breach type that we are watching closely is intellectual property representation. While neither frequency nor severity has shown major increases in our data, 36% of insurers have reported an increased frequency of intellectual property breaches and only 12% reported a decrease. Of claims that come in more than 12 months post-closing, intellectual property is the second-most-severe breach type, behind only financial statements (see Figure 9).

We continue to provide updated data on claims coming in more than 12 months post-closing because this is the typical survival period for a seller escrow. Any recoveries on claims submitted more than 12 months post-closing demonstrate the clear benefit to the buyer of an R&W policy, as those losses would not typically be recoverable from the seller escrow. The most frequent breaches being cited within 12 months post-close remain compliance with laws, tax, and financial statements.

Figure 8
Aon Data: Frequency and Percentage of Total Loss Paid by Primary Type of Breach

Figure 9
Aon Data: Frequency and Percentage of Total Loss Paid by Primary Type of Breach (Notices Submitted > 12 Months Post Closing)

Overall, 49% of claims are coming in more than 12 months post-closing (see Figure 10) and over $400 million has been paid to Aon clients on notices submitted more than 12 months post-closing.

Key Takeaway: The three-year policy period on R&W policies provides a clear benefit to buyers compared with the traditional one-year seller escrow. Double the number of breaches are being reviewed for coverage, given the extended reporting period on R&W policies compared with traditional escrows.

Figure 10
Aon Data: Time from Closing to Notice (Policies Where Coverage for the General Representations Has Expired)