Recent Suit Filed in California Federal Court May Offer Glimpse Into Adjudicating RWI Disputes

A software company—Zywave, Inc. (“Zywave”)—recently filed a lawsuit in California federal court that may provide rare insight into how courts will resolve representations and warranties (“R&W”) insurance coverage disputes. Zywave purchased a buyer-side R&W policy in connection with its acquisition of an insurance product-distribution software company. Zywave alleged that, post-close, it learned that the seller had knowledge of “serious material performance issues with certain customers that it failed to disclose,” amounting to breaches of various sections of the acquisition agreement. The software company further alleged that if the seller had disclosed the performance issues, the software company would have either walked away from the transaction or paid a lower purchase price.

After submitting a notice of claim for indemnification to the seller, Zywave also gave its insurer notice of a claim under the R&W policy. The software company alleged that the insurer admitted that the seller likely committed a breach with respect to two “Material Contracts.” But, despite the admission, the insurer refused to pay the software company for any losses related to the seller’s breach. Accordingly, Zywave brought a declaratory judgment and breach of contract action, captioned Zywave, Inc. v. Travelers Excess and Surplus Lines Company, against the insurer in the Central District of California. The software company is seeking losses in excess of the $10 million policy limit, in addition to other fees and costs associated with the pursuit of its claims.

R&W insurance is still a relatively new product and historically the policies required any dispute to be resolved through confidential arbitration. As such, there is very little case law addressing the issues that arise between insurers and policyholders. In recent years, policies have started offering the policyholder the option to arbitrate disputes confidentially or litigate them publicly in the courts. The Zywave v. Travelers lawsuit is a recent example of a policyholder asking a court to resolve an R&W coverage dispute. The case is only in the beginning stages of litigation, but it may provide an opportunity for much needed guidance on common R&W coverage issues. Stay tuned for updates on the litigation.