AvoidanceGap® Contingency Insurance
Information

As a result of today’s litigious environment and an unprecedented number of entities in financial distress, companies are concerned about being the target of a plaintiff’s strategy to maximize recovery by naming multiple parties in a lawsuit, regardless of the merits of such suit.

Ambridge’s AvoidanceGap® Contingency Insurance product can offer the protection that parties to a transaction or an “ordinary course” of business decision require to address concerns that a “disclaimed liability” will be imputed to them.

Parties involved in the sale of a distressed entity or in the making of “ordinary course” payments may be particularly concerned about a disclaimed liability both in terms of any damages that may be awarded in a judgment against them and the manner in which the mere allegation of such liability could frustrate their ability to successfully complete such transaction or make such ordinary course payments.

Most often, the disclaimed liability relates to:

  • allegations that an entity may be the “successor” of another entity by reason of a transaction; or
  • an attempt to pierce the corporate or entity veil because an entity is alleged to be an “alter-ego” of another
    entity, or merely a “controlled” front utilized solely to escape liability.

Ambridge’s AvoidanceGap® Contingency Insurance can be designed to address these concerns of liability being imputed to them as a result of entering into transactions or other agreements or a third party successfully piercing the corporate or entity veil.

Uses by Deal Point

Some examples of where AvoidanceGap® Contingency Insurance are responsive include:

  • Successor liability
    A potential buyer is in the final stages of negotiating its purchase of a business from a financially distressed company. The transaction has been structured as an asset purchase and buyer's outside lawyers have advised that if the seller fails after the transaction closes, given the consideration paid, any attempts to hold the buyer liable for certain obligations of the seller under the successor liability theory should not succeed. However, with the uncertainties of litigation, the possibility that a creditor of the seller could successfully argue that the buyer is liable for obligations of the seller under the successor liability theory cannot be completely excluded. An AvoidanceGap® policy is issued to respond to claims brought by creditors of the seller under the successor liability theory, which allows the transaction to close.
  • “Alter-Ego” characterization
    A company is selling the stock of its underperforming subsidiary and as a stock sale, all of the assets and liabilities of the subsidiary are being sold. As a result of the negative publicity surrounding the subsidiary, the parent company has a concern that in the event that the subsidiary becomes insolvent after it is sold, trade creditors will successfully argue that the sold subsidiary is its "alter-ego", despite the fact that the entity was never marketed or operated as a division of the parent company. An AvoidanceGap® policy is purchased by the parent company to respond in the event (a) the subsidiary becomes insolvent and (b) creditors bring a claim against the parent company alleging that the subsidiary is its alter-ego.
  • Challenge of an “ordinary course” purchase
    A family held company is negotiating the sale of a parcel of land in its portfolio to a buyer that is operating in Chapter 11 bankruptcy. While the land forms a significant part of the seller's portfolio, the transaction value is insignificant relative to the size of the buyer. The buyer's management does not believe that the transaction needs to be approved by the bankruptcy court. The seller is concerned however, that in the event that the reorganization of the buyer is not successful resulting in an insolvent liquidation, the creditors of the bankruptcy estate may attempt to "clawback" the proceeds of the sale from the sellers by successfully arguing that the transaction was not concluded in the "ordinary course" of the buyer's business. An AvoidanceGap® policy is issued to respond if any claims are made that the transaction was not concluded in the ordinary course.
  • “Clawback” of a distribution
    A private equity owned entity was for a short period of time the legal entity through which a previous owner conducted a certain business that is currently the subject of highly publicized litigation. The entity is operating at a surplus and the directors have been asked to pay a dividend to the private equity fund. While the entity has not been named in the litigation, has an indemnity from the former owner for any exposures associated with the "old business," and the litigation is viewed by legal experts as being without merit, the amounts sought are significant. Given all of these facts, the directors, despite professional advice of its prudence, have a concern that any dividends paid to the shareholders might be viewed as improper transfers under the theory that such payments were made when the partnership was insolvent and thus subject to "clawback." Since the litigation is expected to take many years to resolve the directors do not expect the partnership to be in existence to indemnify them if this scenario comes to pass. An AvoidanceGap® policy is issued to respond to any claims that any dividends paid to the shareholders are improper.

Uses by Transaction Type

Potential uses of the product include:

  • Financings and Investments
    Under construction / Coming soon
  • Licensing Agreements
    Under construction / Coming soon
  • Liquidations
    Under construction / Coming soon
  • Mergers and Acquisitions

    Successor liability


    A potential buyer is in the final stages of negotiating its purchase of a business from a financially distressed company. The transaction has been structured as an asset purchase and buyer's outside lawyers have advised that if the seller fails after the transaction closes, given the consideration paid, any attempts to hold the buyer liable for certain obligations of the seller under the successor liability theory should not succeed. However, with the uncertainties of litigation, the possibility that a creditor of the seller could successfully argue that the buyer is liable for obligations of the seller under the successor liability theory cannot be completely excluded. An AvoidanceGap® policy is issued to respond to claims brought by creditors of the seller under the successor liability theory, which allows the transaction to close.

    "Alter-Ego" characterization


    A company is selling the stock of its under performing subsidiary and as a stock sale, all of the assets and liabilities of the subsidiary are being sold. As a result of the negative publicity surrounding the subsidiary, the parent company has a concern that in the event that the subsidiary becomes insolvent after it is sold, trade creditors will successfully argue that the sold subsidiary is its "alter-ego", despite the fact that the entity was never marketed or operated as a division of the parent company. An AvoidanceGap® policy is purchased by the parent company to respond in the event (a) the subsidiary becomes insolvent and (b) creditors bring a claim against the parent company alleging that the subsidiary is its alter-ego.

  • Restructurings and Workouts
    Under construction / Coming soon
FAQs

FAQs:

  • Who can be the insured under an AvoidanceGap® policy?
    Depending upon the circumstances of the particular situation, the insured can be any entity that has "disclaimed" liability concerns. For example, the Insured could be the purchaser of a business with concerns about the risk of imputed liability for contractually "disclaimed" obligations, or the partner or manager of a business that has concerns about personal or corporate liability for an "ordinary course of business" payment because the corporate or entity veil is successfully pierced.
  • What type of underwriting submission does Ambridge need in order to consider an AvoidanceGap® Contingency Insurance risk?
    Given that our AvoidanceGap® Contingency Insurance risks tend to be "one-off" risks, we suggest that you call us to discuss the risk before making a submission. We can be most responsive to your request if you are able to provide:

    • a description of the risk for which coverage is sought;
    • the reason that insurance for the risk is required; and
    • any analysis that has been undertaken by the client or its professional advisors relating to the risk to be insurd.
  • Will Ambridge consider AvoidanceGap® Contingency Insurance risks in any jurisdiction in which the potential risk might arise?
    While Ambridge's primary focus is on AvoidanceGap® Contingency Insurance risks that are based or may arise in the United States, the European Union, Canada, Australia, New Zealand and South Africa, we can consider risks in many jurisdictions. Ambridge's AvoidanceGap® Contingency Insurance product is not available in all jurisdictions.
  • Is Ambridge’s AvoidanceGap® Contingency Insurance product available to cover financial or performance guarantees?
    While Ambridge cannot provide coverage for financial or performance guarantees alone, we do have the ability to consider writing AvoidanceGap® policies for legal, judicial or legislative risks that only respond if the indemnitor under an indemnity for the "insured risk" becomes financially unable to, or fails to, perform under its indemnity. Unless coverage is desired on a "multiple trigger" basis, we cannot consider policies which involve financial or performance guarantees.
  • How long does it take Ambridge to perform a preliminary review of an AvoidanceGap® Contingency Insurance submission?
    That depends on the nature and complexity of the risk for which insurance is sought. Ambridge is committed to providing you and your clients with "real time" insurance solutions for their transaction-related exposures and will make every effort to respond within the time-frame required by your client.
  • Certain provisions of Ambridge’s template AvoidanceGap® policy are not applicable to my client’s circumstances. Can the template policy be amended to remove or modify these provisions?
    Each Ambridge AvoidanceGap® policy will be tailored to the specifics of the risk to be insured and an insured's specific circumstances. Once an initial proposal has been provided to you, please contact us with any provisions that your client wishes to have removed or amended so that we can consider your request.