Travelers counters Zywave’s lawsuit over breach of acquisition agreements

On Feb 14, Zywave, a Wisconsin-based insurance technology company, filed a lawsuit against Travelers under a representations and warranties insurance policy—a policy with a premium of $425,000—that was specifically acquired for Zywave’s 2021 purchase of ClarionDoor, a Santa Barbara-based insurance distribution software company. Zywave reported to Travelers on Nov 29, 2022, that the seller had breached certain agreements. The company then went on to claim that if the sellers (ClarionDoor) had disclosed the true condition of the business, including its Material Contracts and Major Customers, it would have either withdrawn from the deal or significantly reduced the purchase price.

Travelers has responded to Zywave’s lawsuit by primarily denying the claims.

First, Travelers claims that Zywave failed to cooperate adequately with their investigation:

“Among other things, Plaintiff [Zywave] has materially breached is contractual duty to cooperate with the Defendant, as an insurer, during its claim investigation—a condition precedent to coverage. For instance, in a letter dated November 14, 2023, Plaintiff—after repeated written and oral requests—clarified it was withholding “thousands” of communications involving a Deal Team Member as defined under the Policy (Alex Britton), but objected to producing or, for that matter, identifying or describing the nature of such emails. Plaintiff did so even though, as Defendant explained on numerous occasions, Mr. Britton’s pre- and post- Closing knowledge of the underlying facts is necessary for Defendant to analyze whether coverage exists.”

Second, Travelers argues that damages should be reduced or potentially disallowed because Zywave did not adequately mitigate their damages after acquiring ClarionDoor, as required by Delaware law:

“Plaintiff’s damages should be reduced or otherwise barred for failing to reasonably mitigate its damages as required under Delaware law. Among other things, post-Closing, Insured took control of ClarionDoor and, in that capacity, had a duty to ensure the Company was delivering on or otherwise mitigating risks over its contracts with customers—especially those contracts defined as “Material Contracts” in the Acquisition Agreement.”

Third, Travelers has pointed out that the damages occurred significantly after the closing date of the acquisition (more than ten months later), suggesting that the damages were too remote in time to be directly linked to any alleged breaches at the time of closing:

“Plaintiff is barred or, at minimum, limited from recovering the damages it seeks because they were not proximately caused by the alleged contractual breaches it has identified. That is, here, the temporal and logical connection between the representations under the Acquisition Agreement Insured relies on—which are tied to the Closing date (November 23, 2021)—and the damages it suffered—contract terminations that occurred over ten months later—are far too attenuated to be compensable under governing law…. In fact, even after the alleged breaches, the at-issue customers continued to work with ClarionDoor and, for that matter, expanded the scopes of work under their respective contracts after Closing.”

The latter, by the way, is the same argument brought up by Coverager in our Feb post where we shared: “Did these problems exist prior to the acquisition, or did they emerge post-sale, potentially affected by the conditions tied to fulfilling the earn-out clause? After all, timing is everything.”

Either way, CEO Jason Liu has left Zywave, and according to our sources, the reason given is his desire to spend more time with his family.