How Private Equity Funds Can Use Contingent Liability Insurance to Offload Legal and Regulatory Hurdles in M&A Deals

One of the lessons I learned working with private equity and transactional insurance is that a known liability does not necessarily have to kill a transaction or even permanently depress a company’s valuation.

A company or asset may have a significant underinsured or uninsured liability—litigation, environmental exposure, a toxic tort claim, or another contingent risk—that neither the buyer nor the seller wants to retain. The buyer may respond by substantially discounting the purchase price. The seller, understandably, may not want to accept that discount.

That is where contingent liability insurance can become a transactional tool.

If the liability is known, has been properly evaluated and due diligenced, and can reasonably be valued, insurance can be structured around that specific risk. Instead of accepting a substantial reduction in purchase price, the seller may be able to purchase insurance that gives the buyer sufficient comfort to proceed with the transaction.

And yes, this can also be a valuation strategy. A target company carrying significant litigation may be valued in part through the lens of that exposure. If the litigation risk can be transferred to an insurer on acceptable terms, the company may be able to effectively offload that contingent exposure rather than leaving it with the buyer. By removing or materially limiting that uncertainty from the transaction, the parties may be able to support a higher valuation than if the buyer were required to assume the litigation risk directly.

In other words, contingent liability insurance is not simply about getting a difficult deal across the finish line. In the right circumstances, transferring a known liability can help preserve—or potentially enhance—the value being transferred.

I have seen this work from both sides of the deal. It can help a private equity firm acquire an asset carrying a contingent liability, and it can help a private equity firm sell an asset that a prospective buyer might otherwise consider too risky.

But there is an important distinction between insuring an identified, evaluated liability and trying to insure an unknown future problem.

My rule has always been simple: Stick to what you know, what you can due diligence, and what you can put a value on.

Sometimes the solution to a difficult transaction is not eliminating the risk. It is understanding the risk well enough to allocate it, protect the valuation, and get the deal closed.

I continue to assist with underwriting and due diligence of complex transactional risks, as well as mentoring and expert-witness work when deals go sideways. Feel free to contact me directly or submit a form below.