Case study: New guidance on warranty and indemnity insurance claims

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    30 November 2023

Case study: New guidance on warranty and indemnity insurance claims Desktop Image Case study: New guidance on warranty and indemnity insurance claims Mobile Image

The English High Court has issued a rare decision in relation to warranty and indemnity (W&I) insurance, providing clarification of the scope of coverage under a buyer-side W&I policy. 

In Finsbury Food Group v Axis & Ors, the buyer who was the policyholder made a claim for breach of warranty, asserting that recipe changes and price reductions had affected the profitability of a gluten-free baked goods business. In rejecting the policyholder’s claim, the High Court provided helpful guidance on when there has been a “material adverse change” in a business’ trading position for the purposes of vendor warranties. The decision also reinforces the following important principles:

  • Actual knowledge of any changes to the business prior to completing the purchase will preclude indemnity.
  • The importance of establishing how any claimed breaches of warranty caused loss when making a claim under a W&I policy.

Finsbury Food Group Plc purchased a specialist manufacturer of gluten-free baked goods, Ultrapharm Limited for £20 million. Finsbury took out a buyer-side W&I policy that insured Finsbury against losses arising out of any breaches of warranties by Ultrapharm. 

Finsbury subsequently made a claim under the policy, alleging that Ultrapharm had made undisclosed recipe changes to two of its products and had also agreed price reductions for them with Marks and Spencer plc, its largest customer. Finsbury said that these breached Ultrapharm’s warranties that:

  • there had been no material adverse change in trading position of Ultrapharm since 31 December 2017 (a Trading Conditions warranty); and 
  • following the Accounts Date, there were no price reductions or discounts that would reasonably be expected to materially affect Ultrapharm’s profitability (a Price Reduction warranty). 

The insurers declined Finsbury’s claim on the basis that it was contrived. 

Trading conditions warranty

The Court held that there was no breach of the Trading Conditions warranty for three key reasons:  

  • First, the Recipe Change was agreed and came into effect before the Accounts Date. It was agreed in June 2017, and there was evidence that manufacturing of the Recipe Changes took place in December 2017. There had accordingly been no change “since 31 December 2017”. 
  • Secondly, the Recipe Change was not a “material adverse change” for the purposes of the Trading Conditions warranty. While material adverse change does not have a fixed meaning, the Court considered that it means something that was “substantial or significant as opposed to something of a de minimis level”. The insurers sought to argue that a material adverse change required a loss of more than 20% of total sales, drawings on a threshold provided for in another warranty. The Court rejected this, noting that the Trading Conditions warranty was a separate warranty with separate criteria. In the circumstances of this case, the Court considered that a change of 10% to total group sales since the Accounts Date would constitute a material adverse change. 
  • Finally, the Recipe Changes were made in the ordinary course of business and did not fall within the ambit of the Trading Conditions warranty. The evidence indicated that it was not unusual for M&S to ask Ultrapharm to develop its recipes, with there having been seven recipe changes since 2013. Accordingly, such changes “are not, without more…material adverse changes”. 
Price reduction warranty 

The Court also held that there had been no breach of the Price Reduction warranty. The Price Reduction warranty only covered price reductions agreed after the Accounts Date. The Price Reductions had been agreed in October 2017, before the Accounts Date. 

The Court commented that the Price Reduction warranty was not intended to protect the buyer against price reductions that were yet to come into effect or remove the need to undertake the necessary due diligence, noting that, “…it is to be assumed that Finsbury, as purchasers, will have carried out all necessary due diligence prior to the Accounts Date… The SPA is not intended to be a panacea to resolve any unforeseen consequences of Finsbury’s admittedly light touch approach to due diligence”. 

Actual knowledge 

While there had been no breach of warranty, the Court considered whether an exception clause in the sale and purchase agreement would operate to prevent cover in any event. That clause provided that Ultrapharm would not be liable for a breach of warranty if Finsbury had actual knowledge of the circumstances giving rise to a warranty claim and was actually aware that such circumstances would be reasonably likely to give rise to a warranty claim. 

The insurers had the burden of proving actual knowledge on the part of Finsbury. They argued that if the business director at Finsbury had all the facts available to him, Finsbury could not claim that he did not have actual knowledge. Otherwise, it would lead to a “commercially nonsensical position” where Finsbury could say that it had no “actual knowledge” when Ultrapharm had provided relevant information by email but Finsbury chose to ignore the email or to not open it before completion. 

On the evidence, the Court found that the business director had relevant actual knowledge, and was aware that his knowledge would be fatal to the claim under the Policy. 


The Court also considered whether causation could be established in the event of a breach, concluding that Finsbury would have proceeded with the deal at the purchase price of £20 million in any event. The evidence indicated that Ultrapharm was particularly unwilling to sell, and despite knowledge of deteriorating profits at Ultrapharm, Finsbury did not reduce its offer. Finsbury was not concerned with the financial merit of the transaction; rather, it was “determined to acquire Ultrapharm’s recipes and production knowhow”. Therefore, even if breach could be proved, Finsbury would not be able to show that it suffered any loss. 

Key takeaways 

Finsbury serves as a useful reminder that: 

  • A claim under a W&I policy requires proof of breach of warranty of the underlying SPA. Courts are unlikely to find a breach where any change to the business were made during the negotiation and before the sale and purchase agreement and the facts were available to the purchaser, but the purchaser failed to undertake all necessary due diligence. 
  • The case also highlights the importance of defining “material adverse change” in the context of an insured warranty. If not defined, its meaning will turn on the facts of each individual case and will be uncertain. Even other terms of the relevant contract providing for certain thresholds in other respects may not influence the interpretation of the material adverse change clause. n Insurers can and will make use of knowledge exclusions. The courts will consider the facts available at the time, and the policyholder cannot rely on wilful blindness to avoid the consequences of those facts. 
  • Even if there had been a breach of warranty, the policyholder will need to establish causation. Finsbury illustrates that there will be no claim if the purchaser would have proceeded with the deal for the same price regardless of the changes or differences that are complained of.