Problems with evidence and assessment of damages in W&I claim against insurance tower

In the recent decision of DTZ Worldwide Limited v AIG Australia Limited [2025] NSWSC 12, the Supreme Court of NSW dismissed an insured's claim against its excess layer Warranty and Indemnity (W&I) insurers. In doing so, the Court provided helpful insights into the relevant principles and approaches for assessing damages in breach of warranty disputes, highlighting the critical importance of accurate disclosure in share sale agreements and the need for supportive evidence.

Background

In 2014, DTZ Worldwide Limited (Buyer) agreed to purchase a group of companies from the United Group (Seller), a global property services and management business, for AU$1.215 billion under a share sale agreement (SSA).

The Seller offered a comprehensive set of warranties related to the business and provided a contractual indemnity to the Buyer. The SSA expressly required the Seller to secure its own W&I insurance, making this insurance the Buyer's only recourse in the event of a breach of the Seller’s warranties, rather than pursuing the Seller.

The buy-side W&I insurance policy, which was issued by a primary insurer and 8 excess layer insurers, formed an insurance tower with a total limit of indemnity of AU$300 million (Policy). The retention under the Policy was AU$12.15M, with the primary layer insurer’s limit of indemnity being AU$30M excess of the retention.

In 2010, one of the target group companies, Premas, had entered into a facilities management contract, requiring it to provide property management services for the development of a large sports and leisure facility in Singapore for a 25-year period (FMA). This facility was developed and managed under a public-private partnership (PPP) structure. The financial, funding, and contractual arrangements between the PPP consortium members and financiers were complex and varied throughout the development’s life. The fees for these services were initially fixed, with an ability to review every five years based on indexation or prevailing market rates.

When the SSA was executed, it was just before the first five-year review marker; however, by this time, the FMA was loss-making for Premas, primarily due to increased costs for cleaning services, driven up by newly introduced employment rules and minimum wage requirements.

Claim

Due to the terms of the SSA, Buyer’s right or recourse only stood against the W&I insurers, the Buyer made a preliminary notification to insurers on 7 June 2017 and then formal claim to them on 3 November 2017.

The Buyer asserted that the Seller had:

• breached several accounting warranties in the SSA by incorrectly accounting for certain payments, wrongly capitalising mobilisation costs and failing to recognise the FMA was an "onerous contract".
• failed to disclose significant issues with the FMA, thus breaching the disclosure warranties.
• caused it to suffer losses of approximately AU$215 million.

The Buyer assessed its loss as:

• the value at the time of breach of the losses arising from the FMA; and
• the difference between the value of the business assuming the warranties were true (namely the purchase price) and the actual value of the business; or
• the difference between the purchase price and the price a hypothetical reasonable buyer would have paid if they had known the truth of the FMA.

Coverage for the claim was declined, and on 12 June 2020, the Buyer initiated proceedings. In addition to the claimed loss, the Buyer sought interest under section 57 of the Insurance Contracts Act 1984 (Cth) (ICA), which mandates that an insurer must pay a prescribed rate of interest from the date it became unreasonable for the insurer to withhold payment for a claim.

Settlement

Before the hearing, the Buyer settled its claim against the primary layer insurer and most of the fourth to eighth excess layer insurers. The remaining defendants were therefore the first to third excess layer insurers and one of the fourth excess layer insurers.

Decision

The Court found that:

• the Seller had not breached the accounting warranties. The relevant payments had been correctly characterised as compensation for services provided, and the accounting treatment was deemed appropriate;
• there was insufficient evidence to prove that the FMA should have been recognised as "onerous contract"; and
• the materials disclosed were misleading, due to the Seller's failure to disclose that the cleaning costs were significantly higher than budgeted. This meant that, contrary to expectations, the FMA was likely to be loss-making for at least the first two or more years of its operation. The effected a breach of the disclosure warranty.

Despite the insured's case largely failing, the Court conducted a thorough analysis and application of the principles to the pleaded claim to determine if any damages were recoverable for the successful part of the case, being the limited breach of the disclosure warranty.

The Court rejected the Buyer’s methods of assessing its damages.

Given the limited nature of the breach, a reasonable method for assessing these damages would be to determine the present-day value (as of the date of breach) of the difference between the profits originally forecasted to be earned under the FMA up until the end of the first five-year period and the profit or loss during that period due to the increased cleaning costs.

As any amount calculated in this manner would be substantially less than the attachment point for cover provided by the first excess policy, AU$42,150,000 and the Buyer having settled with the primary insurer, no damages were recoverable against the remaining insurers.

The Court otherwise noted that the use of a discounted cash flow analysis to ascertain actual value was appropriate (as is often the case), but that adjustments made to the discount rate and cashflows were not appropriate, ultimately concluding that the Buyer's claims for damages were not substantiated.

The alternate approach was found to inconsistent with the established principles assessing damages for breach of. The Court concluded that the Buyer's approach lacked a logical foundation and was speculative.

The Court therefore dismissed the Buyer’s claim against the defendants with costs.

Interest under the ICA

The Court concluded that, for the purposes of section 57 of the ICA, and the accrual of interest, it would be “unreasonable” for excess insurers at large to:

• withhold payment under their policies in circumstances where it was apparent from the documents in their possession that they had a liability; and
• rely on the unreasonable conduct of underlying insurers as a basis for refusing to pay any amounts due under their own excess policies, regardless of the attachment points and terms of their own policies.

Implications

This decision highlights the significant evidentiary challenges for insured plaintiffs seeking W&I recoveries, especially when the relevant warranties concern financial, accounting, or valuation matters.

It also highlighted the potential for liability when material information is omitted or misrepresented in corporate transactions. vendors must recognise that even partial truths in disclosure materials can be misleading if updates are withheld or omitted.

The Court reinforced the boundaries of recoverable loss for warranty breaches and emphasised the importance of adhering to established damages valuation methodologies and ensuring that all propositions are relevant to the issues at hand and adequately supported by evidence.