AvoidanceGap® offers coverage for loss incurred due to the recharacterization of a transaction which results in the clawback of amounts paid or imputation of a third party’s liabilities to the insured.
Whether applied in a transaction, in the sale of a distressed entity, or in an ordinary course of business decision, AvoidanceGap® Contingency Insurance can offer the protection that parties require to allay 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:
AvoidanceGap® policies can be utilized by purchasers, partners, or managers of a business to address 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.
AvoidanceGap® policies can be utilized in a wide variety of business agreements including financings and investments, licensing agreements, liquidations, mergers and acquisitions, and restructuring and workouts.
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 the 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 cannot be completely excluded that a creditor of the seller could successfully argue that the buyer is liable for obligations of the seller under the successor liability theory. As a solution, an AvoidanceGap® policy may respond to claims brought by creditors of the seller under the successor liability theory, which could allow the transaction to close.
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. As a solution, an AvoidanceGap® policy may be obtained by the parent company to respond in the event that the subsidiary becomes insolvent and creditors bring a claim against the parent company alleging that the subsidiary is its alter-ego.
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 may be issued to respond to any claims that any dividends paid to the shareholders are improper.
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. However, the seller is concerned that in the event the reorganization of the buyer is not successful and an insolvent liquidation results, 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. As a solution, an AvoidanceGap® policy may respond if any claims are made that the transaction was not concluded in the ordinary course.
If you would like to learn more about AvoidanceGap® Contingency Insurance:
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.
Given that our AvoidanceGap® Contingency Insurance risks tend to be “one-off” in nature, 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(s) that insurance for the risk is required
- any analysis that has been undertaken by the client or its professional advisors relating to the risk to be insured
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 (but not all) jurisdictions.
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 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 alone.
This depends on the nature and complexity of the risk for which insurance is sought. In any event, Ambridge is committed to providing you and your clients with “real time” insurance solutions for transaction-related exposures and will make every effort to respond within the timeframe required.
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.