When a Warranty Policy Excluded the One Claim That Came

The situation

The business had been built by the siblings' parents over three decades: a mid-sized manufacturer near Huntsville making precision components for industrial equipment. When their father retired, ownership passed equally to his three children. Fatima, a surgeon, and Piotr, a specialist physician, had never worked in the business day to day. Kasia had run it as chief executive for the past six years. All three sat on the board and shared equally in any sale proceeds.

A larger industrial group offered to buy the company outright for a price in the range of $65 million, attracted by its client contracts and its plant. The siblings were ready to sell. None of them wanted to keep running a manufacturing business indefinitely, and a transaction at that scale would fund three very different futures. Treadstone Law was retained to act for the family through the sale process, working alongside their accountants and the buyer's counsel.

Deals of this size are rarely simple cash-for-shares exchanges. The buyer wanted protection against the risk that something the sellers had represented about the business — its finances, its contracts, its compliance record — turned out to be wrong. The sellers wanted to walk away from closing with certainty, not years of exposure to claims from a business they no longer controlled. Representations and warranties insurance, often shortened to RWI, exists to bridge that gap.

What the policy didn't cover

Under an RWI policy, an insurer steps into the buyer's shoes if a seller's representation about the business turns out to be false and causes a loss. Instead of the buyer chasing the sellers directly for years after closing, it makes a claim against the insurance policy. For a family like this one, spread across careers that had nothing to do with running a factory, that structure was attractive: a clean exit, backed by a smaller holdback than a traditional deal would require.

But an RWI policy is not a blank cheque. Before binding coverage, the insurer conducts its own diligence, reviewing the same disclosure materials, environmental reports and financial records that the buyer's team reviewed. Anything the insurer's underwriters flag as a known or elevated risk is typically carved out of the policy as a specific exclusion, rather than priced into the premium. The reasoning is straightforward from the insurer's side: insurance is meant to cover unknown risk, not a problem everyone can already see coming.

During underwriting, the insurer's environmental consultant flagged a historical fuel storage tank that had been removed from the plant site years earlier, before Kasia's time running the company. The removal records were incomplete, and the consultant could not confirm the surrounding soil had been properly tested at the time. The insurer responded by excluding any loss connected to that tank and its surrounding soil from the RWI policy entirely. In its place, the buyer required the sellers to give a specific indemnity for that one issue, backed by a dedicated escrow holdback of about $1.4 million held for eighteen months after closing — separate from the insurance, and paid for out of the family's own sale proceeds rather than a policy premium.

At the time, this felt like a minor wrinkle in an otherwise clean deal. The RWI policy would absorb the ordinary post-closing risk of an unknown problem; the tank was a known, bounded, unlikely risk with its own smaller backstop. The transaction closed on that basis.

What we did

1. Read the exclusion language as closely as the coverage grant. Sellers and their counsel naturally focus on what a warranty policy covers. We spent as much time on what it excluded, because an exclusion drafted broadly can end up capturing more than the specific problem it was written for. We pushed back on early exclusion language that would have swept in the entire plant site, not just the tank area, and narrowed it to the specific location and contamination pathway the consultant had actually flagged.
2. Matched the indemnity and the escrow to the exclusion, not to the deal generally. Because the tank issue was carved out of the insurance, it needed its own contractual home. We negotiated the specific indemnity so it was triggered only by loss connected to that tank and that soil, with its own escrow, rather than folding it into the general indemnification provisions where it might have been read more broadly by an arbitrator later.
3. Set a defined end date for the exposure. Environmental issues can take years to surface. We negotiated the eighteen-month escrow period to match the time frame in which any contamination from a decades-old tank was realistically likely to be identified through routine testing, rather than accepting the buyer's initial proposal of an open-ended indemnity with no release date.
4. Advised the family on what remained outside the deal's protection. We were direct with Fatima, Piotr and Kasia before closing: the RWI policy would not respond to this issue under any circumstances, no matter how the loss arose. If soil contamination was discovered, the escrow and the specific indemnity were the only backstop, and the escrow had a ceiling.
5. Responded when the claim was made. Fourteen months after closing, routine testing during an unrelated plant expansion turned up petroleum contamination in soil consistent with the old tank location. The buyer notified the sellers under the specific indemnity, not under the RWI policy, and estimated remediation costs at roughly $2.1 million — well above the $1.4 million held in escrow. We reviewed the notice, the buyer's remediation quotes and the original environmental report to test whether the full amount was properly attributable to the tank issue, or whether some of it reflected unrelated site conditions the buyer was trying to fold in.

The outcome

Our review found that a meaningful portion of the buyer's estimate was reasonable and tied directly to the tank contamination, but that some of the proposed remediation scope addressed drainage improvements the buyer wanted for its own expansion plans, unrelated to the historical contamination itself. We raised this distinction directly with the buyer's counsel rather than disputing the claim outright, since some liability was genuine and undeniable.

After several weeks of negotiation, the parties agreed the escrow would be paid out in full to cover confirmed remediation costs tied to the tank, and the family would pay an additional amount out of pocket — roughly $310,000 — to close the gap on the portion of contamination clearly linked to the historical tank, while the buyer absorbed the drainage and expansion-related costs itself. It was not a result where the family paid nothing further, and it was not a result where they absorbed the full shortfall either. Both sides gave up something to avoid arbitration over a technical environmental dispute that could easily have cost more in expert fees than the amount in question.

The RWI policy, as designed, never paid a cent toward this claim — and it was never expected to. Its exclusion had done exactly what exclusions are meant to do: route a known risk away from the insurer and onto a specific, bounded contractual mechanism instead. The frustration for the family was not that the insurance failed them; it was easy, with distance, to forget that one issue had been carved out entirely, and to assume broader protection than the policy ever promised. Because the escrow and indemnity had been drafted narrowly and tied to a defined time period, the family's exposure was capped well before the claim ever arrived, even though the final number required a further payment beyond the escrow itself.

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