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Litigation and Contingent Risks Insurance
In an M&A, legal risks are typically identified as red flags in the due diligence process. These risks range from regulatory, licensing, permitting, contractual or title issues to name a few. Often, neither party is willing to bear the risk and this prevents a transaction from proceeding. Otherwise, buyers may negotiate for a specific indemnity clause to cover any financial downside risks, demand an escrow or suppress the purchase price. A seller who prefers a clean exit after a sale may not find these requests palatable.
However, lawyers can never guarantee clients the outcome of a dispute and neither can they guarantee that a known legal issue would not eventually materialise. Globally, there has been a growing interest from both disputes and M&A lawyers in considering litigation and contingent risk solutions as a tool to manage the risk exposure of unfavourable outcomes. This provides some level of certainty to clients such that, even in the event of an adverse outcome in a dispute, their financial exposure would be limited to a pre-defined extent.
However, lawyers can never guarantee clients the outcome of a dispute and neither can they guarantee that a known legal issue would not eventually materialise. Globally, there has been a growing interest from both disputes and M&A lawyers in considering litigation and contingent risk solutions as a tool to manage the risk exposure of unfavourable outcomes. This provides some level of certainty to clients such that, even in the event of an adverse outcome in a dispute, their financial exposure would be limited to a pre-defined extent.
There are five main types of solutions that can assist clients to tackle duration and financial uncertainties in these known risks:
- Contingent risk insurance: Identified known risks (ranging from legal issues arising from permits, licenses as well as regulatory issues) may be identified as red flags in the due diligence process and consequently cause an impasse in transactions from proceeding as neither party wants to bear the ongoing risk. Contingent risk insurance tackles legal risks which are capable of legal analysis and evaluation. These risks are typically low in probability but high in severity. Such insurance solutions are bespoke and structured for a payout should an adverse consequence occur.
- Judgment preservation insurance (JPI): Even when one party has secured a favourable judgment or arbitral award, there is a still a possibility that the losing party may appeal the judgment to a higher court or, in an arbitration, make an application to set the award aside. These proceedings take time, leading to duration and financial uncertainty for the company and its stakeholders. JPI removes these uncertainties by protecting the successful party against the risk of the judgment or award from being overturned or the quantum awarded from being reduced on appeal or setting aside respectively.
- Adverse judgment insurance (AJI): As a defending party, the risk of facing a catastrophic loss from a judgment may cause cash flow concerns within the company and erode shareholder confidence. The defence-side AJI guards against an adverse award by insuring a large proportion of damages which the defendant is being sued for.
- After-the-Event insurance (ATE): In costs-shifting jurisdictions, a losing party would need to pay the adverse costs of the opposing party ordered by a court or tribunal. In arbitrations especially, costs can escalate as tribunals typically have the discretion to order costs in the winning party’s favour. Disputing parties can be protected from any adverse legal costs exposure through After-the-Event insurance which protects against the risk of having to pay the other side’s legal costs, the party’s own disbursements and part of their own legal fees.
- Arbitral award default insurance (AADI): AADI covers losses arising from the non-payment of an arbitral award against a host state in bilateral or multilateral investment treaties. This helps the insured claimant mitigate the risk of enforcing an award in international disputes, especially where there may be challenges arising from the differences in legal systems and enforcement mechanisms.
As the first and dominant litigation and contingent risks broker in Asia, our team of disputes specialists is well equipped with the necessary skills and resources to help you navigate the duration and financial uncertainties when encountering known risks.
