Contingent Risks insurance involves the transfer of identified transaction risks away from the deal table and onto the balance sheet of an insurer for a set premium. The seller and buyer can then focus on the core deal issues, without the distraction of an uncertain Contingent Risk.
Where might an issue arise?
- A risk is identified within the transaction and, although the likelihood of the loss crystalising is remote, the financial impact would materially destabilise the investment if it were to occur.
- Through the payment of a premium (calculated as a percentage of the insured liability), the identified contingent liability is transferred to the balance sheet of the insurer.
- Insurance markets have developed to be reasonably creative and significant limits of liability are available.
What will coverage under a policy include?
- Defence costs, damages / settlement costs
- Caps future financial risk for the insured
- Releases business opportunities previously blocked by claims or disputes
- Eliminates potential obstacles to successful M&A transactions
- Subject to the insurer’s agreement, accounts can be noted and provisions removed