Legal Contingency Insurance
Buyers and sellers use legal contingency insurance for a broad range of legal issues. The policy is primarily used to put a ring-fence around a known liability or threat of litigation, or to provide financial certainty surrounding an adverse ruling or final adjudication. This is achieved by providing limits of liability thought to meet or exceed the worst possible outcome or providing limits in excess of a retention. Other applications include:
- Coverage for legal clawback exposures, or monies owed to another party to a transaction based on an indemnification agreement
- Successor liability exposures, defined as liabilities incurred as a result of an asset purchase in which liabilities are not assumed
- Fraudulent transfer or conveyance exposures (i.e., a pre-bankruptcy transfer of assets for little or no consideration)
- Contract issues, inclusive of any action that may be viewed as a breach of contract or financial loss associated with the cancellation of a government contract for nonappropriation of funding
Coverage may be purchased to indemnify the seller (defendant in a legal proceeding) or the buyer. The primary advantages of purchasing legal contingency insurance include providing certainty around an unknown legal outcome that could affect deal valuation and preclude the closing of a transaction, transferring the risk of an adverse judgment to a financially stable third-party and obtaining legal claims management expertise from an insurance company that includes the review of legal tactics and strategies employed by the defendant.
Deal Case Study
A buyer wishes to purchase a portfolio of c-stores from a corporate entity. The senior managers of the entity have been indicted by federal and state authorities for embezzlement and falsely certifying records. Authorities are pursuing the personal assets of the indicted senior managers, but not the assets of the corporate entity. The buyer purchases a legal contingency policy to protect against financial loss should federal or state authorities decide to clawback the entity’s assets at a later date.
Environmental Liability Insurance
Environmental liability insurance is the oldest form of transactional risk insurance. As such, the environmental liability market is characterized by having the largest number of competing insurance providers, the broadest coverage terms, and significant market capacity. Environmental liability policies may be written to provide several first- and third-party insurance coverages, including:
- Preexisting, known conditions (remediation cost cap)
- Preexisting, unknown conditions (pollution legal liability)
- New conditions resulting from the target’s operations (first- and third- party exposures)
- Third-party pollution liability incurred while transporting waste
- Third-party pollution liability at non-owned disposal sites (NODs), inclusive of coverage for bodily injury, property damage, and remediation costs as a potentially responsible party (PRP)
An environmental liability policy may be used to facilitate a deal by providing a buyer with a measure of certainty surrounding these complex liability issues
Deal Case Study
A buyer wishes to purchase a portfolio of c-stores from a seller. It has been determined and agreed that there are known environmental liabilities that need to be cleaned up by the seller. The buyer is concerned about the unknown liabilities that may exist once the excavation begins. The buyer purchases a pre-existing policy to cover any unknown environmental liabilities and purchases a new conditions policy to protect against future unknown occurrences. The policy facilitated a quick close with minimal funds held in escrow.
Conclusion
Transactional risk products effectively transfer the risk associated with a broad range of liability issues that can effect deal valuation or even block a transaction from being completed. They offer the parties to a transaction some certainty around valuation and quality of earning issues. However, the marketing and underwriting processes inherently involved in purchasing transactional risk products are complex Lockton advises each of the parties to a transaction to determine when and how transactional risk insurance products best fit within a comprehensive risk management strategy.
Greg Cushard is vice president /producer at Lockton, leading a strategy and consulting practice. His practice expertise at Lockton is in high risk energy companies, focusing on corporate insurance brokerage, enterprise risk management, captive insurance consulting, and employee benefits. Cushard’s petroleum and crude oil industry expertise resides with refiners, terminal and storage facility operators, gas and convenience store operators, wholesalers, private fleet haulers, and rail exposures. Contact: [email protected] or www.lockton.com
Charles Sternberg is a vice president and project manager at Lockton. He is a senior level risk management consultant with over twenty years of leadership and management experience. Sternberg is a recognized subject matter expert in insurance due diligence, transactional risk products and portfolio insurance programs. He has participated in over 650 private equity deals as an underwriter, insurance broker and diligence project manager.
