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Litigation Buy Out Insurance - What You Need To Know

By Roger Smith

Litigation buy out insurance (AKA LBI) is tailor-made insurance strategy helping to isolate a client from the unpredictability of an outstanding lawsuit.

The insurance can also be used for negating the requirements for the use of escrows or indemnities in a sales deal, providing certainty to both parties involved in the case.

Insurance Coverage 

LBI (or litigation buy out insurance) helps to ring-fence a client from the possible liabilities of an ongoing or anticipated litigation, arbitration, or any other dispute.

This insurance is particularly useful in the context of a sale or business where the unresolved dispute may prevent the sale from proceeding further.

As the cover is customized in each case, the policy can also be tailored to a dispute, no matter what the subject matter is.

Benefits of LBI

  • The litigation buy out insurance plays a significant role in transferring an uncertain liability from the insured to that of the insurer; one that can simultaneously reduce the insured’s concerns about the outcomes of the case.

  • The insurance can also help in transforming third-party contingent claims to a quantified insurance cost allowing them to be accounted for as per the requirement.

  • LBI helps in capping future financial risks. The premium is typically fixed and paid in advance irrespective of the outcomes of the dispute.

  • LBI also helps in releasing business opportunities that were previously blocked by disputes or claims.

  • LBI helps to eliminate obstacles in the way of a pending acquisition or sale.

  • LBI helps in enabling favorable public disclosures, subjected to the insurer’s agreement.

The Policy Form

The LBI is commonly filed as a cover for a known risk, lawsuit, or claim. It can also be filled as a means of protection against an anticipated or a threatened claim.

The insured may also opt to have his/her defense costs included as a part of the liability limit or simply to cover for the possible damages incurred as a result of the case.

  • Retention: The insurer and the insured will have to have an agreement on the excess (it’s the uninsured money, or to be more precise, we say it’s the loss that has to be borne by the insured). The higher the excess, the lower the premium.

  • The period of the policy: The policy terms should typically run from the closing date of the transaction until the date of settlement.

  • Exclusion: MostLBIsvary from policies to policies. However, some exclusions remain consistent throughout the process. These exclusions typically include fines, penalties, and acts committed on the end of the insurer with the intention of violating laws and pension funding deficits.

Final Points to remember

  • Insurance companies typically offer LBIs on the basis of the risk. Higher the risk, higher the premium. 

  • The timescale for obtaining a LBI depends solely on the stage of the dispute. The LBI typically becomes available within 2 to 3 weeks from the date of the first inquiry.  

The legal universe is going through a whole lot of changes. Today, hiring a lawyer doesn’t have to come with the added pressure of billing you as you move along.

Recently, there’s been a surge in the litigation funding market making it possible for a third party financer to fund the entire cost of the court proceedings in return for a fair share of the claim.

But why should you opt for this option for your corporate business? Do they come with benefits? Let’s see.

1. You do have your money, but you need to spend it somewhere else

Completely understandable!

Sometimes even if you have the funds to support your claim, it makes enough save to save the amount for various other uses in our business.

After all, why should you even think of spending your hard-earned money on a court case when you can go for a third-party funder backing your lawsuit and pursue the same for free?

Informing your rivals of the fact that you’ve got a third party financer backing your claim can also help to strengthen your case, sending them a powerful message that you aren’t backing away no matter what. 

2. You’ve got a rich and influential opponent where you cannot afford to take them head-on

If yours is a small corporate organization claiming against a large firm or business, you might be put off by the investment waiting to happen in the coming days.

Most large organizations come with bottomless pockets. Can you afford that? Third party financial options like litigation funding for corporate business may come in exceptionally handy in such situations.

3. You do not have enough funds to drag your opponent to court 

Lengthy legal disputes may ruin you financially. Third party funding can be a way out.

 The same option can also help in turning the odds of winning in your favor.

4. Yours is a huge business looking to offset the time, risk, and cost of the litigation to an outside party

Most of the business ventures, be it small or large, benefit from third party funding. After all, only a few businesses have enough times and resources on their hands to pursue a claim on their own.

Third party funding allows corporations to recover assets without the risk of losses. You, as the business owner, would also be able to have a strategic view of your claim including the ones you have written off since you didn’t have the time and resource to pursue the same.   

5. You would like to send a strong message to your opponent

The litigation funding option plays a massive role in strengthening the odds of your success.

Thus, it also sends a powerful message to your opponent that you have a strong case in your hand and you aren’t backing away by any possible means.

 

So that brings us to the end of this post for now. It’s time we sign off for the time being. Hope you had a great read. 

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