During the course of mergers and acquisitions (M&A) transactions, contingent risks can often be identified for which neither side is willing or able to take responsibility. By ring fencing such an identified contingent risk with a bespoke insurance policy, the risk can be allocated away from the transaction parties allowing the transaction to proceed to completion.
There are many examples of contingent risks including: litigation risks, TUPE risk transfer, contingent environmental risks, employment disputes and specific accounting treatment.
There are many benefits of contingent risk insurance; it helps transfer an uncertain liability from the insured to the insurer and ensures a clean exit for the seller. In the case of an underinsured existing liability, the policy can sit in excess of existing insurance. It also caps future financial risk and protects business prospects.
WHAT WE DO
We can arrange litigation buyout (LBO) insurance for our clients. This is a specialised contingent risk insurance product which helps clients manage risks arising from pending or threatened litigation. It relates to a known, ongoing or threatened dispute.
Examples where LBO insurance may offer a solution include:
- Contractual disputes/threat of future litigation
- Employment practices litigation
- Securities litigation and other class actions
- Intellectual property infringement litigation
- Liability issues arising in the context of a distressed sale.
Contingent risk insurance transfers an uncertain liability off the deal table and away from an insured’s balance sheet to that of an insurer.
We recommend an initial scoping exercise with JLT to explore the coverage and policy structure that may be available.
- Our M&A team combines experienced insurance professionals and corporate tax lawyers with former W&I underwriting experience
- JLT gives you a tenacious and highly experienced global team that are used to working at the speed of the deal 24/7
- Our coverage experts continue to rigorously test our products and exclusive JLT wordings. We consider both the coverage and claims perspective and our claims team play an active role prior to binding policy wordings to ensure that you get the broadest protection available
- We involve our dedicated claims management experts at the outset for their insights when designing insurance programmes. We use their expertise to avoid any ambiguities in the wording and we work with markets that are claims responsive
- We will speak to you in a language you will understand and we will explain any complexities so that you know exactly what service you are getting and what you are covered for. We can explain the particulars of your cover in a clear and concise way for your peace of mind.
An existing JLT client was acquiring the parent of a European domiciled business for circa USD 500 million. One of the major assets of the target was the right, held by a junior subsidiary of the target group, to harvest animal feed. There was a question mark over whether a change of control clause in the subsidiary would be triggered by the transaction at parent level – this would jeopardise its rights to harvest the feed.
The legal analysis on the point identified that the risk was low. However, the impact on the target if the rights were lost would be catastrophic. The deal stalled. JLT arranged a policy to mitigate the risk of a legal challenge as well as a W&I policy to back the warranties in the underlying deal.
Given the bespoke nature of contingent risk insurance, each policy is tailored to the specific circumstances of the transaction. Key considerations are as follows:
- Scope of insured event: define what event(s) will trigger a payment under the policy
- Retention: the insurer and insured will agree on the retention (the uninsured amount of the loss to be borne by the insured)
- Defence costs: the policy often includes cover for defence costs
- Policyholder: the buyer/seller in a transaction, the company facing the specific risk or the defendant (or potential defendant) in a litigation action;
- Policy period for claims to be made: this will depend on the individual risk up to a maximum of seven years (in the case of LBO, it will usually be the settlement or final adjudication of the dispute being covered)
- Policy limit: the estimated amount of the liability plus interest, penalties and defense costs
- Premium: given the wide range of contingent risks that can be insured, premium costs vary. Insurers will consider the complexity of the liability, likelihood of the liability crystallising and the robustness of any available defence.
How to get cover
The insurer will require access to all relevant underlying documentation and legal, tax and accounting advice that the proposed insured has received in connection with the matter.
Insurers will review this along with their own legal counsel. The duration of this process will depend on the complexity of the matter. Typically the policy will be entered into at signing or completion of the deal.