Chapter 4: North America: Industry Sectors and Trends

Billing and Coding Issues Remain a Key Focus in Healthcare Deals and Intellectual Property a Key Focus in Life Sciences Deals

As of Q4 2024, Aon clients have recovered $122.6 million in payments on healthcare claims. Including the retention, $185.8 million in loss has been recognized. Aon clients have 35 active claims in the sector.

Key Takeaway: Heightened due diligence around potential billing and coding issues is likely contributing to the lower frequency of financial statements claims.

The compliance with laws representation is cited most often on healthcare claims at 32%, which is notably higher than the 19% average across all industries (see Figures 8 and 13). Figure 14 shows the breakdown behind what is causing the compliance with laws breaches; billing and coding makes up only 26% of the industry’s compliance with laws claims.

While billing and coding issues contribute to the severity of compliance with laws breaches, the severity is also attributable to violations of non-healthcare-specific laws and regulations (see Figure 14). These include alleged violations of wage and hour laws, anti-discrimination legislation, anti-spam legislation, and privacy laws.

Financial statements breaches have a slightly lower frequency in the healthcare industry (10%) compared with the average across all industries (13%) but remain the representation that has seen the greatest percentage of total loss paid. This is primarily driven by issues with accounts receivable (due to aging/inability to collect) and billing and coding issues that also impact the financials.

M&A Perspective: However, it appears that a focus on financial statements issues during diligence has been effective in keeping down the overall frequency of these claims. They are the fourth-most-common breach type for the healthcare industry after compliance with laws, material contracts, and tax matters.

Figure 13
Aon Data: Healthcare Frequency and Percentage of Total Loss Paid by Type of Breach

Figure 14
Aon Data: Issues Underlying Healthcare Compliance with Laws Breaches

Breaches of intellectual property (IP) representation remain an area of focus for life sciences deals. While currently low in frequency and severity in Aon data, loss of drug or product exclusivity, or a reduction in the time that a company will have exclusivity, can have meaningful consequences for a company in this industry. Currently, there are active claims alleging significant loss arising from an IP breach that are being evaluated by R&W insurers.

With respect to claim variation in these industries based on deal size, smaller deals (enterprise value of $500 million or less) constitute more than 65% of the claims submitted by policyholders (see Figure 15). Deals with an enterprise value in excess of $500 million have a claim frequency that is higher than the proportion of Aon’s book attributable to deals of that size. This is particularly notable for deals with a value in excess of $1 billion, which make up 21% of the claims but only 10% of healthcare and life sciences deals insured by Aon.

Figure 15
Aon Data: Percentage of Aon Healthcare Claims and Deals by Deal Size (2019–2024)

Intellectual Property Comes into Focus for Tech Deals

As of Q4 2024, Aon clients have recovered $183.3 million in payments on technology claims. Including the retention, $265.6 million in loss has been recognized. Aon clients have 27 active claims in the sector.

Key Takeaway: The creation, implementation, and use of technology products creates exposure for buyers across financial statements, material contracts, and intellectual property representations, making diligence around these disclosures paramount.

Figure 16 shows that in the tech sector, the most frequent breach types are tax matters (21.7%), material contracts (18.4%), and intellectual property (15.8%). These three breach types are each above the all-industry averages (16.6%, 13.5%, and 8.6% respectively). Though tax is the most-cited breach type, these claims tend to be low in severity. The main causes of tax claims are sales and use tax audits, which often result in no assessment or only a minor tax adjustment.

While the financial statements breach is not among the most common breach types, like many industries, financial statements claims make up the highest percentage of recovered loss across the tech sector. The common financial statements breaches in this sector are accounts receivable issues; improper tracking of billing/services provided; or, like other industries, more run-of-the-mill accounting errors that have an impact on EBITDA.

Another source of loss across the tech industry is related to the implementation of contracts. This typically relates to material contracts representations but can also trigger breaches of the financial statements representations. One example we have seen is when a contract to implement a tech product is made pre-closing, but the date to complete the implementation is in the post-closing period. When the buyer receives control of the company, they realize that the implementation date cannot be met, as the project is behind schedule. This can result in loss related to having to renegotiate the contract, termination of the contract, or loss of additional services that were scheduled to be provided post-implementation.

Figure 16
Aon Data: Technology Frequency and Percentage of Total Loss Paid by Type of Breach

The final main cause of loss in the tech sector is related to claims that arise from a breach of the intellectual property representation. These claims can be seen in different types of businesses but are most often found in the software industry when a third party alleges that the company’s software products are infringing on its IP. IP lawsuits and associated losses under the policy can have multiple outcomes ranging from mild to severe, such as (1) defense costs only as the company defeats the lawsuit; (2) a lump-sum payment to resolve the IP dispute with the company retaining the IP; (3) an ongoing obligation to use the IP, such as a license or royalty; or (4) a determination that the company cannot use the IP and a potential complete loss of the value of the transaction.

Lastly, Figure 17 shows that deals below $100 million in the tech sector have a lower rate of claims than deals above $100 million. In fact, while claims below $100 million make up over 40% of all deals, they only make up 29% of claims. Conversely, for deals between $100 million and $500 million, between $500 million and $1 billion, and over $1 billion the claims rate is higher than the percentage of deals. The largest discrepancy in this band is in deals between $500 million and $1 billion, where these deals make up 8.3% of all tech transactions but account for 14.9% of all claims.

Figure 17
Aon Data: Percentage of Technology Claims and Deals by Deal Size (2019–2024)

Assets Key to Deals as Claims Move Through the Pipeline

As of Q4 2024, Aon clients have recovered $90.3 million in payments on energy, oil, and gas claims. Including the retention, $149.7 million in loss has been recognized. Aon clients have 10 active claims in the sector.

Key Takeaway: The prevalence of high-value assets in this industry increases the likelihood of condition of asset claims.

One of the most relevant breach types for the energy (including renewable energy), oil, and gas industry is condition of assets, which accounts for 12% of all claim notices compared with 5% of claim notices filed for all industries (see Figures 8 and 18). Condition of assets breaches have resulted in 24% of the total claim payments made in the energy, oil, and gas industry to date, which is among the highest for any industry. Given these transactions often involve considerable investments in assets such as pipelines, machinery, equipment, and facilities, special attention should be given when negotiating the language of this representation along with conducting appropriate due diligence. The issues driving these claims have included a failure to properly test and maintain pipelines, repair and/or replace equipment and machinery, or maintain facilities in good operating condition. In addition, in some cases these issues can require the pipeline, equipment, or facility to be shut down for repair or replacement. In this scenario, the resulting loss can grow to where the company suffers lost profits and/or damaged customer relationships during the downtime.

Financial statements breaches are also on the high end of frequency and severity, accounting for 43% of claim payments in the industry. Figure 19 illustrates the various matters underlying financial statements breaches, which include missing or obsolete inventory, misrepresentations of operating expenses, improper revenue recognition, and poor accounting controls or policies. The issue of a failure to disclose or accrue for asset retirement obligations, which is a risk that is highly relevant to this industry, accounts for 12.5% of financial statements claims. This financial risk exposure has wide applicability in the energy, oil, and gas industry due to the existence of extensive infrastructure with wells, facilities, and pipelines as well as other environmental liabilities.

Figure 18
Aon Data: Energy, Oil and Gas Frequency and Percentage of Total Loss Paid by Type of Breach

The material contracts representation is another area where we have seen claim frequency and severity. As discussed in the payment severity section, breaches related to material customer or vendor contracts drive claim severity across all industries. While it is not an industry-specific risk, due to the infrastructure or specialized equipment that is sometimes required to service customers or work with certain vendors, a material contracts breach can be more damaging to a company in this industry where the loss of a customer or vendor occurs.

Figure 19
Aon Data: Issues Underlying Energy, Oil, and Gas Financial Statements Breaches

Product and Inventory Issues Can Lead to Large Losses

As of Q4 2024, Aon clients have recovered $215 million in payments on retail and consumer claims. Including the retention, $320 million in loss has been recognized. Aon clients have 36 active claims in the sector.

Key Takeaway: The retail industry often relies on a high volume of smaller transactions, creating exposure to large claims arising from inventory management and consumer trends that negatively impact the balance sheet.

The most frequent breach type that leads to claims in the retail and consumer industry is compliance with laws and, with a relative frequency of 26.5%, it is above the all-industry average of 19% (see Figures 8 and 20). However, the compliance with laws claims in this sector are significantly lower than the all-industry severity data, accounting for just over 2% of loss compared with the 12% market average. Our data shows that wage and hour lawsuits make up the majority of these compliance with laws breaches. Since the retail and consumer industry has a high number of lower-wage hourly employees, these claims continue to fall at or just below retention. As retentions remain near historical lows, it will be interesting to see whether a higher percentage of these breaches will result in losses above the policy retention in the future.

Issues surrounding inventory lead to 35% of all financial statements claims (see Figure 21) and account for significant losses in this sector. Claims are arising from issues around inventory control, which can result from poor physical counting in the warehouse; inventory management systems that are not accurately tracking warehouse operations; or even issues arising from the improper tracking of refunds, returns, and restocking. Depending on the facts underlying these issues, they can touch on a few breach types, but most commonly large losses related to these issues show up as financial statements breaches due to the impact of this missing or unaccounted-for inventory on EBITDA. This industry is also commonly prone to other types of financial statements breaches. Channel stuffing and issues arising from inflated sales numbers because of a limited time promotion/discount have also led to large losses suffered by our clients.

Figure 20
Aon Data: Retail & Consumer Frequency and Percentage of Total Loss Paid by Type of Breach

Figure 21
Aon Data: Issues Underlying Retail and Consumer Financial Statements Breaches

In addition, the business interests of consumer product companies can often be heavily tied to relationships with “big box” stores and it can result in high-value claims when this relationship becomes impaired. We are predominantly seeing issues related to customer complaints leading to a big box store no longer purchasing the product, products only valued when on promotion but not at full price, or even when a product falls out of fashion and the big box store no longer wishes to give shelf space to said product. Moreover, sometimes these issues can be challenging to diligence, as certain large outlets will not speak with potential acquirers before closing. When these impairments occur pre-close but are not adequately disclosed, our clients may be left with a company worth less than was represented.

The retail and consumer industry sees a higher percentage of claims on deals for over $500 million than for smaller deals. As Figure 22 shows, deals where the enterprise value is between $500 million and $1 billion make up 15% of all deals, but 23% percent of claims. The discrepancy on a percentage basis is even more pronounced for deals with an enterprise value greater than $1 billion, where those deals account for 3.5% of all deals but 7% of all claims.

Figure 22
Aon Data: Percentage of Aon Retail and Consumer Claims and Deals by Deal Size (2019–2024)

Financial Statements Are Key Focus for Construction and Infrastructure Deals

As of Q4 2024, Aon clients have recovered $91.9 million in payments on construction and infrastructure claims. Including the retention, $123.2 million in loss has been recognized. Aon clients have 21 active claims in the sector.

Key Takeaway: Inventory issues, WIP adjustments, and a failure to accrue for liabilities drive financial statements payments.

The construction and infrastructure sector has seen just over 50% of the payments made to companies relate to the financial statements breach type (see Figure 23). These claims have arisen out of problems with inventory (missing, overvalued, obsolete), poor accounting procedures resulting in a failure to adequately accrue for bad debt or other liabilities, issues with work-in-progress (WIP) adjustments, and the incorrect depreciation of assets.

Behind financial statements, compliance with laws breaches account for 11% of the claims made and 20% of the total amount paid. The relevant risk exposure for the construction industry is wage and hour violations. It is common for the construction industry to employ hourly workers and the nature of the job can lead to problems with adequate compensation, overtime pay, independent contractor misclassification, and union-related issues. While we see most wage and hour claims settle, Aon clients in this industry have still recovered seven-figure amounts on several claims.

For the infrastructure industry, condition of asset claims have figured meaningfully in paid losses, receiving 14% of the total amount paid to date. The cost to repair or replace major infrastructure has proved significant for clients in this industry and can often involve complicating factors, such as changes to commodities or labor markets and environmental regulations that must be considered. Diligencing large infrastructure assets can be difficult and we have seen significant claims arise out of operational issues or structural defects that were not disclosed prior to the close of the deal. It has also been the case that perceived small problems with infrastructure have, as a result of undisclosed seller actions, resulted in significantly increased post-close repairs and expenses for buyers.

Figure 23
Aon Data: Construction and Infrastructure Frequency and Percentage of Total Loss Paid by Type of Breach

Interestingly, 60% of the claims filed by companies in the construction and infrastructure industry category have been submitted more than 12 months post-close. This is higher than the average across all industries, which sees about 50% of claims submitted more than 12 months post-close. About 33% of the claims coming in post 12 months are the result of litigation or tax matters, which often are discovered and noticed later in the policy period. However, the remaining claims that have come in later in this industry include claims alleging a breach of the compliance with laws, financial statements, and material contracts representations (see Figure 24).

Finally, larger deals in this industry category appear to have a higher frequency of claims compared with the percentage of total deals that fall within the same deal size band. Deals with an enterprise value between $100 million and $500 million had a claim frequency of 50% but accounted for only 36% of all policies placed in this industry (see Figure 25). Deals with an enterprise value above $1 billion accounted for 17% of all claims in this industry but only 6.5% of all deals. Smaller deals with an enterprise value below $100 million saw only 25% of clams filed despite constituting just over 50% of the policies placed in this industry.

Figure 24
Aon Data: Construction and Infrastructure Frequency and Percentage of Total Loss Paid by Type of Breach (Notices Submitted > 12 Months Post Closing)

Figure 25
Aon Data: Percentage of Construction and Infrastructure Claims and Deals by Deal Size (2019–2024)

Product Quality and Status of Key Customer Relationships Are the Primary Risk Factors

As of Q4 2024, Aon clients have recovered $228.7 million in payments on manufacturing claims. Including the retention, $325.6 million in loss has been recognized. Aon clients have 39 active claims in the sector.

Key Takeaway: Severity in the manufacturing sector is tied to being able to timely fill customer orders without sacrificing quality.

The manufacturing industry has had over 50% of losses result from material contracts breaches (see Figure 26). Underlying these breaches are the failure to meet performance/quality obligations under supplier agreements, general misrepresentations around the nature of business relationships with key customers, undisclosed or loss generating contracts, and undisclosed discounts and rebates offered to client pre-closing (see Figure 27). While material contracts/customer claims are not much more frequent in this industry (averaging 14% of the claims in manufacturing compared with 13% in all industries), there is high customer concentration in the industry and as a result, when claims do arise, they can often be significant.

Unsurprisingly, product liability breaches are a top driver of loss in this industry as well (20% compared with the overall average of 4.6%), along with financial statements and condition of assets breaches. While the fact patterns giving rise to these breaches may lend one representation to be more applicable than another for a given claim, the underlying cause of these breaches is related to inventory. Inaccurate warranty reserve calculations and allegations of product defects have resulted in significant costs and penalties to recall products, costs to dispose of obsolete inventory, and increased manufacturing costs to rectify the issue. Additionally, inaccurate representations about the conditions of manufacturing facilities have led to excess scrap and manufacturing costs and lost revenue, and have made existing contracts unprofitable.

Figure 26
Aon Data: Manufacturing Frequency and Percentage of Total Loss Paid by Type of Breach

Figure 27
Aon Data: Issues Underlying Manufacturing Material Contracts Breaches

Since inventory-related issues are not always subject to a multiple of damages, financial statements breaches aren’t as severe in this industry. However, when a breach impacts the underlying cost to manufacture products or revenue for existing contracts, our clients have been successful in claiming a multiple of damages for the decreased profitability of the business.

While tax has the highest claim frequency in the manufacturing sector, there has been a relatively low severity to date. Most tax claims have been the result of unpaid tariffs and U.S. Customs and Border Protection violations.

Of the claims that are currently active, condition of assets, environmental matters, and material contracts are the leading breach types (see Figure 28). While we have yet to see paid loss on environmental breaches in this industry, there are significant active claims arising from excess emissions at manufacturing facilities. Additionally, there are significant active condition of assets breaches arising from machinery operating past capacity prior to closing, as well as general shortfalls of industry operating standards for acquired facilities.

Figure 28
Aon Data: Percent of Active Manufacturing Claims by Primary Breach Type

Accounting Issues and Key Customer Contracts Drive Losses

As of Q4 2024, Aon clients have recovered $183.5 million in payments on transportation and logistics claims. Including the retention, $214.5 million in loss has been recognized. Aon clients have 16 active claims in the sector.

Key Takeaway: While not all issues are industry specific, over three-quarters of all loss arises from financial statements and material contracts breaches.

As Figure 29 shows, nearly 30% of all claims within the transportation and logistics industry arise from breaches of the compliance with laws representation. However, much like the retail and consumer section covered earlier, these claims typically do not result in severe loss; this industry has an outsize number of hourly employees and as such, the most common type of compliance with laws claim is related to a third-party wage and hour complaint. Ultimately, the exposure here is driven by the number of employees, the time frame of the alleged wrongful conduct, and the hourly wage being paid. Loss typically exceeds the retention when a few of these variables are significant.

Instead, over 75% of all loss in this sector comes from just two representations: (1) financial statements and (2) material contracts. Interestingly, the claims that arise from these two breach types are very different in how industry specific they are.

The financial statements breaches that make up most of the claims within this sector are not specific to transportation and logistics. They primarily comprise the typical accounting mistakes and errors that we see across a wide variety of industries. These include improper booking of accounts payable/receivables, improperly noting recurring expenses, and customer overbilling issues.

Conversely, the claims that allege breaches of the material contracts representation are much more closely tied with the particulars of the sector. The main drivers of loss include contract performance issues with major online retailers, contract and rebate issues around nationwide fuel provider contracts, and third-party contracts around parts/services to keep a fleet operational. These contracts either provide revenue or help service a fleet so that it can fulfill its revenue-producing obligations and have led to significant loss when they are impaired prior to closing.

Figure 29
Aon Data: Transportation Frequency and Percentage of Total Loss Paid by Type of Breach

Notably, the transportation and logistics industry is the sector with the highest percentage of claims filed more than 12 months post-close. In fact, as Figure 30 shows, 63% of all claims are filed after 12 months. This is led by compliance with laws claims, which make up 33% of these claims, but financial statements and material contracts claims combine to make up nearly the same amount. Obviously, absent a R&W policy in place there would be no coverage for these claims, as the typical survival period for a seller escrow is 12–18 months.

Figure 30
Aon Data: Time from Closing to Notice (Transportation Policies Where Coverage for the General Representations Has Expired)