Cover for an identified, quantified legal risk, such as the adverse outcome of a known dispute, often in a transactional context.
Contingency insurance covers a specific, identified and quantified legal risk, most often the adverse outcome of a pending or potential dispute whose financial consequences are estimable. Unlike warranties insurance which covers unknown risks, and tax liability insurance which targets a tax treatment, contingency insurance isolates a precise legal hazard and transfers its cost to an insurer. It allows neutralising a risk that would block a transaction, distort a valuation or weigh on a balance sheet, by turning an uncertain exposure into a bounded cost. Widely used in private equity and litigation finance, it relies on sharp legal underwriting: the insurer must assess the probability of success of a litigation position, from lawyers' opinions and case analysis, without the benefit of the law of large numbers. Rigorous case selection and control of adverse-selection risk determine the profitability of this niche line.
A company exposed to a potentially heavy judgment in a pending dispute can transfer this risk to a contingency insurer to secure its sale or valuation.
contingent risk insurance, assurance de contingence, litigation insurance, adverse judgment