Energy Horizons: W&I – can willful misconduct and gross negligence be insured pursuant to Italian law?

April.22.2022

In the last decade, Italy has seen an exponential growth of W&I insurance policies in the M&A energy market. There are several issues being debated around the use of this product, one of them being whether willful misconduct and gross negligence can be insured pursuant to Italian law. We discuss this with Andrea Gentili, a partner on our Italian energy team.

 

Transcript:

Daria Buonfiglio:

Hi everyone, and welcome to a new episode of Energy Horizons, a podcast by the Italian energy team at Orrick; a Podcast where we talk about the most relevant issues in the Italian energy market. Today is the 21st of April and we’re here with Andrea Gentili, partner of our team, to talk about W&I insurance policies and to understand whether, pursuant to Italian law, wilful misconduct and gross negligence can be insured under such insurance products. So, as we all know, W&I are insurance policies which cover the losses arising from breach of representation and warranties given by the seller under sale and purchase agreements. This is an insurance product which has seen an exponential growth in the last decade in the Italian market. Is that correct, Andrea?

Andrea Gentili:

Yes, definitely. I would say that from 2013 we have started to see the first W&I products in M&A deals on the renewables and, since then, they have been used consistently and increasingly. Currently, the vast majority of the renewable deals have a W&I product in place, particularly when it comes to sizable transactions.

Daria Buonfiglio:

Okay, and without going into too much detail, can you tell us which are the main types of W&I insurance policies you have seen in the Italian M&A energy market?

Andrea Gentili:

Yes, very very quickly, essentially you can have buy-side policies where the buyer is the insured party. Sell-side policies, very rare in reality for the reasons that we will mention. Very rarely we find sell-side policy where the seller is the insured party. And then there is a particular category of policies that it’s still a buy-side policy - the contingency policies that are being used increasingly in the recent past and there are - those policies are designed to cover specific risks that arise in the due diligence space.

Daria Buonfiglio:

Okay. And so now drilling down into today’s topic. Let’s start from saying why some say that wilful misconduct and gross negligence cannot be insured pursuant to Italian law.

Andrea Gentili:

Yes, we often hear this general statement according to which in case of gross negligence or wilful misconduct. On the one side, limitations to seller liability under the SPA do not apply, and on the other side, the W&I policy cannot provide coverage. In reality, this is not true, neither in respect of the seller’s liability limitations for the reasons that maybe we can discuss in another episode of this podcast, nor in relation to W&I coverage, which is today’s subject. Or, more precisely, not in respect of buy-side W&I policies. Indeed, according to section 1900 of the Italian CB code, insurer is not liable for wilful misconduct or gross negligence of the insured party. This means that the buy-side policies where the insured party is the buyer and not the seller, it is possible to cover both gross negligence and wilful misconduct of the seller, which is not possible by contracts in sell-side policies and this is probably one of the reasons why buy-side policies are much more used when compared to sell-side policies.

Daria Buonfiglio:

Okay. So, to answer the question of our podcast, the answer I believe is yes, W&I insurance policies can cover wilful misconduct and gross negligence pursuant to Italian Law, correct?

Andrea Gentili:

Exactly. Gross negligence is indeed increasingly often already covered by insurer by W&I policies, whereas wilful misconduct is typically excluded in all the polices that we have seen so far. But it is important point to clarify, this is a commercial issue. So, is the insurer being unwilling to take the wilful misconduct risk? It’s not a legal one. It’s not a legal issue. So, we cannot exclude that going forward the insurance will consider to offer coverage also for wilful breach of the reps and warranties by the seller.

Daria Buonfiglio:

Okay, thank you very much, Andrea. This was a very interesting conversation.

Andrea Gentili:

Thanks to you.

Daria Buonfiglio:

And stay tuned, because during the next episode we will address the important news coming from the Energy Decree, and so we will talk soon.