M&A contingent risk insurance: Protecting a deal

What is contingent risk insurance?

Contingent risk insurance for M&A, and other investment or financing transactions, offers insurance for a broad range of contingent risks for which neither party to the transaction will accept financial responsibility.

The insurance transfers a known or uncertain contingent liability from (usually) a buyer’s balance sheet to an insurance company.

Such insurance can cover a very broad range of contingent risks, which may be identified during due diligence conducted as part of the transaction process.

Contingent risk insurance typically offers coverage for known identified legal risks such as:

• Litigation
• Shareholder disputes
• Liquidation insurance/successor liability
• Legal interpretation risk for identified litigation/arbitration (particularly appeal risks of favourable first-instance decisions)
• Intellectual property or employment disputes
• Specific accounting treatment
• Contingent environmental risks
• Other regulatory exposures
• Complex title risks

A contingent risk insurance policy typically is tailored to the specific circumstances of a transaction.

Who should buy contingent risk insurance?

Usually, an acquirer purchases coverage — as the buyer would primarily suffer loss if the contingent risk arose.

Occasionally, a seller purchases coverage in the event that a risk in question is contractually transferred to them.

Investors or financers may require a company to purchase contingent risk coverage, in order to protect the valuation of the business and their investment or financial position in the company.