At Class Action Managing General Agency, we provide the only class action settlement insurance that can be purchased after a company is facing a multimillion dollar liability.
While most settlements are designed to provide peace, finality and certainty – claims-made, class action settlements are usually an uncertain rollercoaster that plague companies’ financial statements. The question is always – what will the take rate be and what is our exposure and costs going to be under the settlement? Companies often seek out advice from lawyers, third-party administrators, and other experts trying to find answers to these questions. Unfortunately, professionals are only willing to speculate because no one would or could guarantee the actual cost of the settlement fund.
That is until now! Our proprietary insurance product allows companies for the first time ever to resolve their pending class action litigation by insuring the settlement fund and overcoming the major obstacles: Uncertainty, GAAP, and Tax Deductibility
By resolving financially devastating class action litigation, companies are taking steps to provide certainty. However, the claims-made process can wreak havoc on a company’s balance sheet and cash flow projections since no one can provide the exact amount of money that will be paid out of the settlement fund, which can linger over many quarters or years.
With our settlement insurance product, we assume all of the risk and uncertainty of the claims- made by class members. By removing the risk of the settlement fund, companies can now focus on their core mission – building their businesses – rather than managing class action settlements. Additionally, companies can ascertain the exact cost required to resolve the litigation, rather than trying to balance guesses and estimates on the anticipated payout.
Once a company settles class action litigation, then Generally Accepted Accounting Principles (GAAP) principals require the company to take a charge for the full amount of the settlement (vs. anticipated take rate) fund. Since the full amount of the settlement – assuming 100% participation by class members – has created a known and potential liability, the company has to book the entire settlement liability during the pendency of the claims process.
These GAAP charges can be devastating to companies for the following reasons: impair their balance sheets; drag down earnings; restrict borrowing ability; inhibit collateral, violate certain loan covenants making certain notes callable; and result in undisclosed and unplanned financial losses occurring during one or more quarters.
To avoid taking the GAAP charge for the full settlement fund, companies can now transfer the risk of the settlement by purchasing insurance. By transferring the liability of the settlement fund to an insurance carrier, the companies are not required to take a charge on its balance sheet under GAAP.
For some cases, for some settlement, the payments to class members are not tax deductible. For example, if a company settles a claim for fraud or misrepresentations, the IRS may not allow the settlement payments to be tax deductible. However, companies can typically expense the premium for our GAAP qualified insurance product as a regular and necessary business expense. In certain cases, the tax benefits alone may cover all or most of the premium costs making the insurance even more compelling.
Class Action Settlement Insurance (CASI) provides four key advantages:
- GAAP qualified Risk Transfer*
- Tax Deductibility of the premium vs. nondeductible payments to class members