What is it?
Contingent risk insurance covers risks that are known – such as pending or issued litigation, a potential or actual regulatory issue or challenges arising from a re-organisation or restructuring.
Typically, an insurer will require that the known risk is quantifiable and capable of legal assessment. Generally, contingent insurance works best in scenarios where the risk is remote (making it insurable) but the potential business impact is severe (making insurance an attractive option for the insured). Pricing is highly bespoke, but typically falls within the range of 2% – 10% of the limit of insurance.
Why use it?
Clients have often utilised contingent insurance to unlock transactions, such as M&A and finance deals, that may otherwise have been derailed by the known risk. Insurance is often a cheaper and more efficient risk transfer mechanism compared to other options, such as a price-chip, indemnity, escrow arrangements or expensive third-party security.
Increasingly, contingent risk insurance is also being deployed outside of the transactional context. For example, to allow a contingent liability or asset balance sheet provision to be released, allowing dormant cash to be utilised and recycled through a business. In this way, contingent insurance is helping clients to unlock upside as well as mitigate downside risk.
HOW CAN WE HELP
In a very wide range of settings, we advise clients on contingent risk insurance solutions designed to meet a variety of challenges, including:
We structure contingent insurance solutions for disputes that are either active, threatened or which have the potential to emerge in the future.
A business may have been successful in a dispute, but that result could be overturned on appeal. A judgment preservation insurance policy “locks-in” the successful outcome, allowing the business to be sold and/or release accounting provisions connected to the dispute.
Contingent insurance can provide a safety net where contractual provisions do not provide sufficient certainty – for example, a buyer may lack confidence that it can rely upon a chain of indemnities purportedly in favour of the target.
We arrange insurance that protects insolvency practitioners, creditors and other stakeholders involved in the winding up of an insolvent estate against the risk of third-party claims.
Buyers can have concerns regarding their liability to fund very significant pension liabilities – a well-crafted contingent insurance policy can mitigate such risks.
Cover for specific environmental liabilities (including known pollution and remediation liabilities).
A renewables target may be at risk of reclassification such that the preferential price it receives for selling energy would be lost. Such risks, which often turn on a legal issue, are insured with growing frequency.
Potential tax issues
Cover for tax risks on M&A transactions, refinancing and restructuring.
Cover for ownership risks including on M&A, real estate and infrastructure transactions.
Contingent insurance can be deployed to cover a range of risks, including infringement claims, non-use trade mark revocation and potential gaps in IP assignments.
Reorganisations can shed light on a range of debt, company and other legal risks that can be addressed by a contingent insurance policy.
Arbitration award default insurance
Guarantees payment of a legally enforceable arbitral award against a sovereign entity within an agreed timeframe following the sovereign’s failure to honour it.
OUR PRESENCE AND CLIENTS
Our clients are global PE houses, sovereign wealth funds, secondaries funds, infrastructure and renewable funds, corporations, venture capital firms, litigation funds, credit funds, alternative asset managers and family offices. Our global practice has acted on over 4,000 transactions in jurisdictions including the UK, continental Europe, Africa, Asia, North and South America.
Our team of leading individuals have varied and in depth experience of all industry sectors. We pride ourselves on using this experience to pre-empt potential issues at the outset of a transaction to help deliver efficient and pro-actively managed solutions. Our aim is to control processes and leave our clients free to focus on the wider transaction.
US PE fund
Issue: Target was a cartel whistle-blower. Bidders concerned about potential liability for EUR 100ms of “follow-on” claims brought by customers.
Solution: Policy negotiated to cover “catastrophic” liability for claims above EUR40m.
UK PE fund
Issue: DD revealed that target may be subject to a ROFR in favour of a third party – buyer was concerned that the right could be enforced and the deal potentially unwound.
Solution: Policy arranged to pay out up to GBP 40m in the unlikely event that the third party successfully enforced the ROFR.
European PE fund
Issue: Renewables target paid a preferential rate for the energy it produced. However, potential non-compliance with a permit could have resulted in that rate being forfeited.
Solution: EUR 3.3m policy agreed to cover the risk of forfeiture and the target agreed to remedial steps to mitigate the risk of non-compliance.
SOLUTIONS (NON M&A)
US asset manager
Issue: Business is subject to significant and vexatious litigation that makes a planned listing on the LSE commercially unviable.
Solution: Policy negotiated to cover catastrophic liability for claims above D&O policy and modest layer of self-insurance.
Issue: Plc successful in ca. £100m claim against HMRC. Business wanted to release provision but HMRC appealed the case to the ECJ.
Solution: Insurance policy paying 90p/GBP 1 in the event of an adverse determination at the ECJ. Provision released.
European PE Fund
Issue: Constructor settled claims relating to a failed PFI contract but was concerned that the settlement did not protect it against third party claims.
Solution: GBP 20m policy agreed to cover third party claims.