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Litigation Buyout Insurance: A Case Study

Defending litigation is ultimately an exercise in risk management. So how do companies manage to protect themselves?

In the context of a company preparing for sale, litigation can often delay or in some cases halt the transaction.  There are a variety of ways to address litigation such as a large escrow holdback or a purchase price reduction.  However, these solutions may not be palatable to the seller.

Another option is Litigation Buyout Insurance (“LBO Insurance”). But as everyone wants to know, how does it work?

Risk Settlements recently had a webinar with Celesq on LBO Insurance where they discussed LBO Insurance and the benefits it can bring to your litigation. 

An example they discussed was a FACTA case, which stands for the Fair and Accurate Credit Transactions Act. In short, the law says that beginning in 2006, no entity that accepts credit or debit cards for the transaction of business may print more than the last five digits of the credit card number or expiration date upon any receipt provided at the point of sale. Any willful violation allows a consumer to recover statutory damages ranging from $100 to $1,000 per occurrence and willful means, “not only knowing violations of a standard but reckless ones as well.”

In this particular example, a selling company had violated FACTA and if a jury were to find them liable, it could owe somewhere between $250 million and $2.5 billion. Clearly those are huge numbers and that is why this litigation was a concern for the potential buyer.  Without resolution, the M&A deal would likely falter.

So how did LBO Insurance salvage the transaction? Our firm analyzed the risks and issues and designed a solution that met all of the parties’ objectives, secured risk transfer for the first dollar of loss, and provided commercial and rational cost options that ultimately allowed the deal to close.

LBO insurance can be adapted to fit a number of complex litigation issues. In each case, it removes the uncertainly of what the litigation will ultimately cost by ring-fencing the liability for a known, fixed cost.  The end result is the removal of obstacles that may deter an M&A or financing transaction.

If you would like to view our recent webinar with Celesq on LBO Insurance for free, click here.

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