Chapter 9: EMEA: Breach Types and Trends

Breach Types

The warranty breaches mirror those reported last year, with tax being the number-one breach type by frequency, followed by financial statements, litigation, compliance with laws, disclosure of information, and material contracts.

We have reviewed the types of breaches that we most commonly see occur on EMEA W&I claims and have compared this data to the percentage of total loss attributable to each breach type. We see claims notifications against multiple warranties, as one underlying issue may lead to breaches of more than one category of warranty. It is important to note that we have included all warranties breached, rather than only one warranty per claim, and this should be considered when interpreting the data in Figure 41. Once breach is established under one warranty, that will be sufficient for a successful claim and there is typically then little analysis on the applicability of the other warranties claimed against.

Figure 41
Aon Data: W&I Frequency by Type of Breach Versus Percentage of Loss Attributable to Each Breach for the Period 2016–2024

As demonstrated in Figure 41, the number-one breach notification by frequency on EMEA W&I claims is tax. Following tax, and in keeping with last year’s claim stats, financial statements, litigation, compliance with laws, disclosure of information, and material contracts remain our top breaches by notification and the most likely areas where claims arise.

Tax has always been a key driver of claims notifications in Europe as a consequence of European tax authorities conducting audits of newly acquired companies. These audits are often routine in nature and do not lead to any allegation of a tax liability, which is reflected in the lower loss levels. Covered tax losses will often be paid on an indemnity dollar-for-dollar basis. Although claim notices may be submitted, there may also be limitations in cover (such as exclusions for transfer pricing), which will mean that claims do not progress. Aon’s data shows that the European regions most likely to see W&I tax claim notifications are France and Iberia.

We continue to see financial statements breaches being the second-highest-notified breach type and, once again, this category of breach represents the highest proportion of loss (27%). Given that losses that arise from financial statements tend to impact the purchase price of the acquired company, calculation of loss may be claimed on a multiplied basis depending on the relevant facts, European jurisdiction, and applicable framework. 

Aside from financial statements, the material contracts, compliance with laws, and litigation warranties have losses that exceed their relative claim frequency. Some of these warranty categories, such as financial statements and compliance with laws, can be categorized as “sweeper” warranties that respond to varied circumstances giving rise to a claim and so may be harder to diligence effectively. On the other hand, the notifications with respect to both material contract and litigation breaches are more likely to be responding to their specific area of risk. For material contract breaches, the quantum of loss is often higher where recurring revenue was associated with a terminated or disputed contract.

Top Breach by Industry

Expansive industry data is becoming key to broking and claims.

Figure 42 represents claim notifications by target industry for Aon for the period 2019–2024 and Insurer Survey data for the period 2020–Q3 2024. We must allow for an element of subjectivity as to how target industries have been assigned within the data between Aon and the contributing insurers. The data may also reflect sector appetite and experience. Aon and Insurers agree that there is a high incidence of claims where target companies are in the manufacturing industry.Again, due to the size of the data set, the Insurer Survey is indicative as a sample and should be considered alongside the Aon data in aggregate rather than comparatively.

In addition to manufacturing targets, Aon data clearly shows a high incidence of claims in other industries, namely financial services, infrastructure and healthcare, pharmaceuticals, and life sciences. Insurers have seen a high incidence of claims in real estate, TMT, and retail/hospitality. We find the high proportion of real estate claims surprising in a sector that is typically low-priced due to a perceived lower risk of claims, linked to insurer expectations of reduced operational risk.

Figure 42
Aon Data: Claims Notifications by Industry

To attempt to delve a little deeper into the industry breakdown, the heat map in Figure 43 (comprising Aon data only for 2019 to 2024) compares key industries and the types of claims that we most frequently see occurring therein. 

The heat map is provided with a health warning, however, as the data set becomes small when divided by both industry and warranty category and so should be considered anecdotal rather than as a statistically meaningful correlation. 

As anticipated by the breach by warranty type data, tax and financial statements claims are prevalent across nearly all industries. Financial services and healthcare/pharmaceuticals generally see higher numbers of claims in nearly all key warranty categories across the board. This is despite certain sector-standard exclusions typically seen in policies for targets in these sectors, such as medical malpractice for targets in the healthcare/pharmaceutical industries. In the manufacturing industry, we see that the higher claims notifications are more likely to arise in the financial statements, disclosure of information, and “other” categories. 

The “other” category contains such a broad array of warranty breaches by category across the manufacturing, financial services, professional services, and healthcare/pharmaceuticals sectors that it might be said that for higher-risk industries, W&I really does serve its purpose of responding to those unforeseen losses and risks to value, outside of the usual areas of focused diligence and warranty cover.

Figure 43
Aon Data: Claim Notifications by Industry and Type of Breach

Timing for Discovery of a Breach

Figure 44  shows that 64% of claims are notified with the first 18 months.

Figure 44
Policy Inception to Claim Notification

Figure 45 shows the Insurer Survey data for the percentage of notifications made on policies placed between 2017 and Q3 2024. Interestingly, 5% of claims were notified before the close of the transaction.

Figure 45
Insurer Survey Data: Time from Policy Inception to Claim Notification

M&A Perspective: Where there is a split signing and closing (and in the absence of interim breach cover purchased to cover the gap period), claims that arise in the interim period will not be covered under a W&I insurance policy unless the issue occurred before signing and was not disclosed by the seller. We have seen a marked increase in insureds notifying insurers of claims pre-closing on a precautionary basis.

Both Aon and Insurer Survey data show a similar trend for the timing of notifications. 

Figure 46 shows the timing of breaches notified within and after 12 months; 41% of claims are notified within the first 12 months. Notably, the types of breaches that are likely to see a notification post 12 months of the deal closing are tax, compliance with laws, and licences/public permits, with financial statements claims notified consistently both within and after the 12-month period post-acquisition. 

Figure 46
Timing of Breaches Notified Within and After 12 Months

Trends Based on Parties to Transaction

Figure 47 shows that Aon’s client base from 2019 to 2024 is made up of 43.5% corporate clients and 56.5% investors. Our data from the claims study last year recorded more deals with corporates (54%), which marks a slight shift this year to deals with investor clients. In keeping with last year’s data, however, Figure 48 shows that, between 2019 and 2024, corporate clients continued to bring 59% of the total claim notifications submitted notwithstanding the fact that they are now the smaller percentage of Aon’s EMEA client base.

M&A Perspective: We have hypothesized that the increased notifications from corporates may be due to the makeup of Aon’s historical client base, but also the increased likelihood of integration of newly acquired businesses and therefore greater discovery and notification of any circumstances that may give rise to potential loss as a matter of course. However, compared with last year’s study, in which notifications from corporates approached 70% of notifications received, there has been a shift, with an increase in claims by investors. The Insurer Data (see Figure 51) shows a higher proportion of claims from investors than corporates. It is unclear currently whether this is linked to the PE deal activity seen in 2021 and early 2022 or this is a more structural and sustained shift in claims activity.

Figure 47
Aon Data: Proportion of Deals by Client Type

Figure 48
Aon Data: Proportion of Notifications by Client Type

Figure 49 shows that, in aggregate, corporates drive a higher proportion of the total amount initially claimed for upon notification, but it remains the case that investor clients receive a larger claim payout on average, based on the Aon data in Figure 50. Please refer to Chapter 7 and our note on initial claimed loss data and considerations to have in mind when interpreting this data.

Figure 49
Aon Data: Proportion of Initial Claimed Loss by Client Type

Figure 50
Aon Data: Average Settlement Amounts (2019–2024) by Client Type

Figure 51  shows the Insurer Survey data with respect to corporate and investor buyers with respect to claims made and claim payouts on policies placed between 2017 and Q3 2024. Insurer Survey data shows that their investor buyers have a higher notification rate than corporates but also recover significantly more under their policies than their corporate counterparts.

Figure 51
Insurer Data: Proportion of Notifications and Paid Loss by Client Type