What is ‘contingent risk insurance’?
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 a 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.
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.