Insuring Contingent Risks

Insurance can be used as a cost effective way of offsetting risks that arise in the ordinary course of business or that are identified during a transaction or financing.

HWF are able to structure insurance backed solutions to ring-fence potential issues providing certainty if such an issue crystallises.

What makes a risk insurable?

The key function of contingent risk insurance is to remove the financial uncertainty of an adverse determination or crystallisation of the relevant liability. For a risk to be insurable the following criteria are necessary:

  • Advice from a credible advisor. This can include due diligence reports, structure papers or legal opinions.
  • The risk must be quantifiable.
  • The probability of loss needs to be relatively low.
Key points:
  • Provides buyers with a recourse mechanism for warranty breaches and claims under the tax indemnity.
  • Reduces the likelihood of difficult negotiations.
  • The buyer can tactically explore each option in turn with the seller.
  • Works best where the limits to be insured are in excess of 10% of the total deal value and over £5m.
  • The earlier we are involved, the more value the insurance will add to a transaction.
Issues that can be covered

Known matters relating to:

  • Pensions
  • Environmental
  • Litigation/matters under appeal
  • TUPE/Employees
  • Contractual liabilities

Balance sheet liabilities/capital release:
If a business has provided for contingent liabilities, insurance can ring-fence such liabilities removing them from the balance sheet.