Commercial Litigation Funding
Litigation Buy Out Insurance

Litigation Buy Out Insurance

When buying, selling or merging a business there can often be various parts to the transaction that expose either the purchaser or seller to risk. One such risk is where one party, typically the seller, has some form of potential contingent liability arising either from existing or potential future litigation. The litigation threat can pose a difficulty for a buyer unless it can be demonstrated with a large degree of certainty that the financial exposure can be contained.

A purchaser may be appeased by escrowing funds to cover the potential liabilities arising from the litigation, but where the sums are significant that may not be the most efficient means to deal with the issue for either party. Fortunately, a specialist form of insurance exists called Litigation Buy Out Insurance (also known as Litigation Containment Insurance) that overcomes this problem.  

What is an LBO Policy?

A litigation buy out insurance (LBO) policy is designed to de-risk a party(s) from either an existing or potential future legal liability. It is therefore a policy designed to insure a very specific and identified risk. Provided the LBO insurer is able to assess the legal risk of the potential liability occurring, they can potentially offer a bespoke insurance policy to indemnify the insured against the legal costs (both defence and other side’s costs) as well as, crucially, any liability for damages that the company might be exposed to.   

Typically, the key negotiation point with the LBO insurer is agreeing the level of excess that the insured will agree to provide (i.e. how much of the potential litigation risk is the policyholder willing to retain before the insurer’s indemnity kicks in). The greater the excess the lower the premium cost of the policy.  Each LBO policy is individually priced as the risks involved are highly case specific.

Where the policy is purchased pursuant to an acquisition or merger the cost of the Litigation Buy Out insurance can often be an item that is factored into purchase price as part of the negotiations between the buyer and seller By ring-fencing the issue causing concern with the help of an LBO policy, the existing or prospective litigation risk need no longer be a barrier to the acquisition taking place.

Very few brokers or insurers have the experience in offering these highly bespoke insurance solutions. Based inside the Gherkin within the heart of the City, TheJudge has access to insurers who can write up to circa £100m for any one policy.

Example of Litigation Buy Out Insurance in Practice:

Company A is seeking to pursue company B, but company B has a risk attached to one of its areas of business that could result in litigation.  Company A might decide there is too much uncertainty to proceed with the transaction or alternatively the negotiation process might become protracted as company A and B each seek to value the contingent liability.  

By obtaining an LBO policy the buyer and seller can remove the headache via an insurance policy that ringfences the liability.  The insurer provides an indemnity to the policyholder against the insured liability.  This can typically reduce the number of warranties that need to be provided in the transaction and remove the need to lock up cash in escrow accounts.
Other examples of how LBO insurance can be used beyond M&A scenarios:

•    Appease shareholders and reduce the impact of stock market announcements
•    Assist businesses seeking to raise cash from third parties such as lenders or extend credit terms
•    Releases a business from the burden of tying up capital in a reserve for the potential liability
•    Provides a cap on liability in the event of a catastrophic or punitive outcome at an affordable premium

Make an application:

To make an application for LBO insurance or to discuss a potential opportunity, please initially contact Matthew Amey to discuss your requirements.
We can also make available a lawyer’s guide to LBO Insurance upon request. Email matthew.amey@thejudge.co.uk or call 0845 257 6058 for further information.

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