BUSINESS SELLER’S INSURANCE POLICY COVERS BUYER’S $17 MILLION NEGLIGENT MISREPRESENTATION CLAIM

Introduction:

In this M&A legal case, a business buyer sued the seller for making false statements during negotiations, leading to a deal gone bad. The buyer won a claim for negligent misrepresentation against the seller, and the seller’s insurance company was ordered to pay $17 million to the buyer.

The Deal:

The buyer, a Texas-based distributor of medical equipment, purchased distribution rights from the seller, the prior distributor, under an asset purchase agreement. The seller had breached its agreement with the equipment manufacturer, causing problems with customer satisfaction.

The Lawsuit:

Two years later, the buyer faced financial difficulties and sued the seller, alleging fraudulent inducement into the purchase. The buyer claimed that the seller and the manufacturer misled them about the equipment’s revenue potential. The arbitration panel ruled in favor of the buyer’s negligent misrepresentation claim, awarding them $18 million (with a $1.2 million settlement credit) for expenses incurred during the transaction.

The Insurance Policy:

The seller had a management liability policy, but the insurance company initially denied coverage based on a breach of contract exclusion clause, which the insurer argued applied to the buyer’s claim. However, the Texas state trial court disagreed, stating that the exclusion only covered losses related to actual contract breaches, not tort claims like negligent misrepresentation. The court ordered the insurer to pay the buyer $17 million.

This case is referred to as Carolina Casualty Insurance Company v. Spicer, No. 1D20-916, District Court of Appeal of Florida, First District, (June 29, 2021).