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Camila Carvalho explores how Contingent Risk Insurance is being used to close deals

Associate Director Camila Carvalho discusses how contingent risk insurance is being used by both buyers and sellers to facilitate deals and allow them to navigate periods of economic or regulatory instability.

Camila’s article was published in Finance Derivative, 1 April 2025, and can be found here.

 

As economic instability and regulatory scrutiny continue to rise, contingent risk insurance is playing an increasingly important role in mitigating M&A-related uncertainties.

This specialised form of insurance provides both buyers and sellers with protection against known but uncertain risks that could otherwise be a deal breaker in a transaction or significantly impact its financial outcome.

This article will explore how buyers and sellers are using contingent risk insurance to facilitate M&A deals, and how it can offer dealmakers and their advisors with peace of mind during periods of economic or regulatory instability.

Contingent Risk Insurance for buyers and sellers

We are increasingly seeing buyers turning to contingent risk policies to mitigate specific exposures that could affect deal value, such as unresolved tax disputes, ongoing litigation, or regulatory challenges.

Similarly, sellers are now also using these policies to secure a cleaner exit by removing potential liabilities from negotiations, reducing escrow requirements, and ensuring full distribution of sale proceeds.

In the face of recent economic and regulatory waves, insurers are therefore stepping in to provide businesses with a greater level of certainty around transactions, helping deals progress even in a challenging economic and legal environment.

Contingent Risk policies

The market for contingent risk insurance is expanding, with insurers developing bespoke solutions tailored to the complexities of modern M&A transactions.

There are a number of key Contingent Risk policies which are being utilised as part of this, with one of main being Tax Insurance. This type of policy is able to mitigate risks by protecting dealmakers against uncertain tax positions – which can be particularly valuable in cross-border deals and complex restructurings.

Similarly, Litigation Insurance can offer both buyers and sellers with a greater peace of mind. These policies cover potential damages or settlements from ongoing legal disputes, ensuring contingent liabilities do not affect deal completion or valuation.

Regulatory & Environmental Risk Insurance is another increasingly popular form of Contingent Risk insurance.  This can provide businesses with coverage for compliance risks, antitrust concerns, and environmental liabilities – all key considerations when operating in highly regulated sectors.

Key considerations

In order to ensure optimal coverage, early engagement with brokers is crucial. Both buyers and sellers should involve brokers and insurers early in the due diligence process to identify risks and structure appropriate coverage.

Similarly, comprehensive underwriting and risk assessment is another key consideration when considering Contingent Risk Insurance. Insurers require detailed legal and financial analysis to assess coverage eligibility and pricing and a well-documented risk evaluation can lead to more favourable terms.

It is also important to understand the policy scope and exclusions of Contingent Risk policies, as some risks may require alternative risk transfer mechanisms.

The presence of Contingent Risk insurance may also influence deal structuring and negotiations, potentially reducing escrow requirements and making offers more competitive.

Looking ahead

The current uncertain economic climate has made contingent risk insurance more attractive to buyers seeking financial certainty in acquisitions. With regulators increasingly scrutinising M&A transactions, particularly in industries such as technology, healthcare, and energy, this has only driven demand for policies that mitigate regulatory intervention risks.

In certain cases, depending on specific sectors or jurisdictions, traditional Warranty and Indemnity (W&I) insurance can be more restrictive. Dealmakers are therefore turning to Contingent Risk solutions to fill coverage gaps and enable complex transactions to proceed. Insurers are similarly innovating by offering more flexible and tailored policies to address evolving deal risks.

The market for Contingent Risk insurance is expected to grow as investors, private equity firms, and corporates recognise its value in de-risking transactions.

Future developments may also include expanded coverage for emerging risks such as cybersecurity liabilities and ESG-related contingencies, aligning insurance solutions with broader market trends.

In an increasingly complex and uncertain M&A landscape, Contingent Risk insurance is proving to be a vital tool in ensuring deal certainty and mitigating potential liabilities. As its adoption continues to grow, both buyers and sellers will need to stay informed on how best to leverage this evolving insurance solution to optimise deal outcomes.