Contingent Risk Insurance can be used in the context of an M&A transaction and also for other investments, restructurings or financing transactions. It offers insurance for a broad range of contingent risks for which neither party is willing to stand behind. The insurance transfers a known or uncertain contingent liability from a company’s balance sheet to an insurance company.

Such insurance can be put in place prior to a transaction process to isolate risks in portfolio companies that can thereby allow sellers to address issues before commencing a sale process and present a buyer with a prepared solution. Alternatively, it can be used as part of an ongoing transaction process when an issue has been identified as part of the due diligence exercise. They can also be used for stand-alone risks with no connection to a transaction as part of a prudent risk management strategy.

Contingent Risk Insurance is tailored to the specific circumstances of the risk in question and typically offers coverage for risks such as:

  • Legal interpretation risk
  • Pension associated risks
  • Shareholder disputes
  • Specific accounting treatment
  • Environmental risks
  • Regulatory exposures

Any party to the risk (provided they can show they have an insurable interest) can be insured. Sellers often purchase coverage in order to ring fence the risk in question. Buyers also look to take out these policies in the event they would be the party suffering the loss if the contingent risk arose. Other parties such as lenders, liquidators and investors may also require protection to protect their interests.

Putting in place a Contingent Risk Insurance policy requires a formal risk analysis, and for those matters with a more specific legal interpretation, then a legal opinion from a reputable law firm with expertise in the subject matter of the risk in question which:

1. Sets out the factual background and the commercial rationale to insure the risk;

2. Analyses the applicable law and/or regulation;

3. Analyses and quantifies the loss that may be suffered should the risk crystallise: and

4. Provides a conclusion as to the likelihood of the risk crystallising.

Contingent risks are typically low in probability but can have significant damaging consequences for a business. Given this there is a wide disparity when it comes to pricing which is determined by insurer appetite, severity, jurisdictions involved and complexity. Premium rates historically can typically vary between 4-15% the policy limit.

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