Specialist risk transfer
Contingent risk insurance offers an insurance solution to mitigate or remove uncertainty in respect of an identified risk. Contingent risk insurance can be secured before, at the time of or after a given transaction.
If a risk relates to legal interpretation and there is sufficient analysis to support a defense, insurance can often be used.
Contingent risk insurance provides financial cover to the insured in the event of the crystallization of an identified risk. Our team has placed policies that provide financial cover to policyholders in the event of a crystallization of an insured risk including, where possible, defense costs, interest and penalties. The risks have included litigation – both ongoing and prospective as well as a way of dealing with adverse creditors arising from a voluntary liquidation. With respect to litigation, this has involved employment-related claims, contract disputes and legal interpretation of tax rulings.
Contingent risk insurance can be used to:
Take an identified risk off the deal table
Increase the indemnity cap through insurance whilst simultaneously reducing the indemnity cap for a seller
Negate the concerns about the creditworthiness of a seller using an A-rated insurer as a counterparty
Allow for a clean exit meaning the seller can distribute proceeds of a sale and liquidate immediately from closing, boosting IRR
Obtain more protection than a seller is willing to give
Transfer a contingent liability from a company's balance sheet to that of an insurer
Contingent risk insurance provides financial cover to the insured in the event of a crystallization of an insured risk including, where possible, defense costs, interests and penalties.
A contingent risk insurance policy is held by the company facing the specific risk in question or, where relevant, the buyer or the seller under a purchase agreement.
The policy period can vary depending on the risk in question, but is typically up to a maximum of ten years.
Retention or excess
The retention, also known as the excess, is typically a nominal amount or nil. In certain circumstances, the retention will be used to prevent recovery for a certain amount of defense costs.
The policy limit is the estimate amount of the liability plus interest, penalties and defense costs.
The premium is calculated on a case-by-case basis and can range between 5% – 20% of the policy limit. Factors affecting the premium include the likelihood of the liability crystalizing, the robustness of the technical defense available and the complexity of the liability.