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Broker M&A –how far does your indemnity go?
A recent case in the High Court has demonstrated how a court may construe a contractual indemnity in the context of broker M&A.
In 2010, Capita Insurance Distribution acquired Sureterm Direct, a specialised motor insurance broker. Shortly after the acquisition, Sureterm's employees raised concerns about former sales processes. Sureterm duly informed the FSA and agreed to carry out a customer remediation exercise as a result of which Sureterm was obliged to pay £1.35m to customers in redress.
Capita then sought to rely on an indemnity given by the sellers in the sale agreement to recover this amount, together with costs and interest. The indemnity was expressed to cover: "...all actions, proceedings, losses, claims, damages, costs, charges, expenses and liabilities suffered or incurred, and all fines, compensation or remedial action or payments imposed on or required to be made by the Company following and arising out of claims or complaints registered with the FSA, the Financial Services Ombudsman or any other Authority against the Company...."
The issue was whether this language captured the redress payments, given that these resulted not from claims or complaints registered with the FSA, but from a voluntary approach to the FSA by Sureterm. The court found that the indemnity did indeed capture the amounts claimed. This was the result not just of a close legal analysis of the language of the clause, but also of the commercial and regulatory context in which the clause was negotiated. The court pointed out that the indemnity would have been triggered regardless of the manner in which the FSA became involved, giving in particular the following examples: employee whistleblowing, management audit/review, a market-wide review, or a consumer complaint. It stated that the indemnity would apply regardless of whether the company had invited customers to lodge a claim or simply sent customers a cheque in the absence of a formal claim in fulfilment of its obligations (note this differs from the general position under a professional risks liability policy, where a payment is generally only covered if it follows an express customer claim or review opt-in).
This case is interesting since it demonstrates the court's awareness of the changed regulatory environment that brokers operate in and the self-regulation that they are increasingly expected to undertake and it is clear to us that the court was in turn influenced by these developments. It is also reminiscent of the court's approach in a case in 2012 where it upheld a professional indemnity claim by Standard Life in respect of a pre-emptive settlement amount it had paid in advance of a fully formulated legal claim, as required by the policy. It is clear that the courts are increasingly willing to look beyond the black letter of the contract to the reality of the commercial environment. Notwithstanding the court's approach in this case, we would strongly advise buyers that indemnities of this nature be clearly expressed to cover all forms of regulatory redress, whatever the origin.