AvoidanceGap® Contingency Insurance
Information

Given the sharp rise of insolvencies in the current business environment, claims which call into question the validity of transactions, dividends or other payments made by an entity that has since become insolvent can be expected to become more frequent. These claims, which seek to unwind a transaction or clawback a dividend or other payment, can be brought under a variety of legal theories, including assertions that a transaction was a transaction at an undervalue, a dividend was improper, or a payment is a preference payment. In addition to the potentially negative financial impact of an adverse court decision, because of the likely need to involve forensic accounting and valuation experts in analysing a claim, the out-of-pocket expenses incurred in defending such a claim can be significant. Ambridge Partners’ AvoidanceGap® Contingency Insurance product has been designed to offer protection for these exposures.

Uses by Deal Point

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

  • Transaction at an Undervalue
    A diversified manufacturing company is the target in a pending transaction. Within the past two years, it completed the sale of one of its loss-making divisions to a group of private investors. The fundamental premise of the acquirer’s business plan was that the operating costs of the business could be reduced significantly by moving a key supply contract to a lower cost provider. Shortly after the sale of the division completed, it became clear that the new and lower cost key supplier’s product suffered from severe quality issues. This in turn resulted in quality issues with the business’s products and several major accounts were lost. The business was forced to return to its original key supplier and was unable to realise the operating cost savings forecast in its business plan. The reduction in sales together with the inability of the business to reduce its costs caused the entity to suffer significant operating losses which could not be sustained. Less than a year after the sale had completed administrators were appointed for both the buyer and the target. Legal advisers to the buyer in the pending transaction have identified the potential for a claim to be filed by the administrator against the seller alleging that it received more consideration for the business sold than value was received by that buyer. If such a claim is filed, the financial impact of the former transaction being unwound or other court orders/awards could be significant. An AVOIDANCEGAP® policy is purchased by the seller to respond to any losses that may be incurred by in the event that the administrators bring a claim.
  • Preference Payment
    Company A loans money to Company X. Company X begins to experience financial difficulties of which Company A is aware. In an attempt to ensure that Company A does not call on the loan, Company X offers to give Company A a debenture over Company X's undertaking as security for the loan. Within 6 months of the debenture being entered into, Company X enters into liquidation. The prospective buyer of Company A is concerned that the taking of security by Company A could be challenged as a preference and reversed leaving Company A to claim as an ordinary unsecured creditor in the liquidation of Company X for the loan amount. An AVOIDANCEGAP® policy is purchased by Company A to respond to any losses that may be incurred in the event that such a challenge is mounted.
  • Clawback of a Dividend
    Company Y is currently the subject of highly publicised litigation and was briefly owned by Company Z which has cash that significantly exceeds its operating requirements. The litigation is viewed by most legal experts as being without merit but the potential damages are significant. Company Z, which is owned by a group of private equity funds, has not been named in the litigation and has received an indemnity for claims related to this litigation from Company Y and its parent. The directors of Company Z have been asked to approve payment of a dividend of excess cash to the private equity fund shareholders. Given all of these facts, the professional advice received by the directors of Company Z is that the making of the dividend is prudent. However, the directors have a concern that any dividends paid to the shareholders might subsequently be viewed as improper transfers under the theory that such payments were made when Company Z was insolvent (because of the latent contingent liabilities associated with the litigation) and thus be subject to clawback. The directors expect that the private equity fund shareholders will have liquidated by the time the litigation is resolved and in light of this are concerned that a claimant may attempt to hold them personally liable for repayment of the dividend. An AVOIDANCEGAP® policy is purchased to protect the directors of Company Z in the event that such a claim is brought against them.
  • “Alter-Ego” characterization
    A US based 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 the subsidiary becomes insolvent and creditors bring a claim against the parent company alleging that the subsidiary is its alter-ego.
  • Challenge of an “ordinary course” purchase
    A US based 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 the subsidiary becomes insolvent and creditors bring a claim against the parent company alleging that the subsidiary is its alter-ego.
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

    Transaction at an Undervalue


    A diversified manufacturing company is the target in a pending transaction. Within the past two years, it completed the sale of one of its loss-making divisions to a group of private investors. The fundamental premise of the acquirer’s business plan was that the operating costs of the business could be reduced significantly by moving a key supply contract to a lower cost provider. Shortly after the sale of the division completed, it became clear that the new and lower cost key supplier’s product suffered from severe quality issues. This in turn resulted in quality issues with the business’s products and several major accounts were lost. The business was forced to return to its original key supplier and was unable to realise the operating cost savings forecast in its business plan. The reduction in sales together with the inability of the business to reduce its costs caused the entity to suffer significant operating losses which could not be sustained. Less than a year after the sale had completed administrators were appointed for both the buyer and the target. Legal advisers to the buyer in the pending transaction have identified the potential for a claim to be filed by the administrator against the seller alleging that it received more consideration for the business sold than value was received by that buyer. If such a claim is filed, the financial impact of the former transaction being unwound or other court orders/awards could be significant. An AVOIDANCEGAP® policy is purchased by the seller to respond to any losses that may be incurred by in the event that the administrators bring a claim.

    Preference Payment


    Company A loans money to Company X. Company X begins to experience financial difficulties of which Company A is aware. In an attempt to ensure that Company A does not call on the loan, Company X offers to give Company A a debenture over Company X's undertaking as security for the loan. Within 6 months of the debenture being entered into, Company X enters into liquidation. The prospective buyer of Company A is concerned that the taking of security by Company A could be challenged as a preference and reversed leaving Company A to claim as an ordinary unsecured creditor in the liquidation of Company X for the loan amount. An AVOIDANCEGAP® policy is purchased by Company A to respond to any losses that may be incurred in the event that such a challenge is mounted.

    Alter-Ego" characterization


    A US based 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 the subsidiary becomes insolvent and 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.