If a customer files for bankruptcy, the appointed bankruptcy trustee can challenge and reclaim payments made previously—in the worst-case scenario, amounts running into the millions.

What is contestation insurance?

If your customer files for bankruptcy, the appointed bankruptcy trustee has the option to challenge and reclaim payments previously made to you in order to include them in the bankruptcy estate. However, this is only possible if the insolvency administrator can prove that you were aware of the customer’s payment difficulties even before the insolvency began. Contestation insurance protects you against these claims for repayment, which, depending on the customer, can amount to millions.

As part of a challenge, the insolvency administrator may reclaim all sales made between the date the grounds for the challenge arose and the date of the last invoice issued. Depending on the customer, the amounts subject to the challenge can run into the millions.

What are the benefits and reasons for purchasing contestation insurance?

Insolvency Challenge Insurance offers additional protection against the consequences of a potential insolvency challenge, safeguards the company’s liquidity, and ensures stability and flexibility.

Three facts about challenging insolvency proceedings show why this approach can be worthwhile:

  • Long-term traceability: Legally, payments made up to 4 years prior to the commencement of insolvency proceedings and up to 3 years during the ongoing insolvency proceedings may be challenged.
  • Presumption of Prior Knowledge of Insolvency: The insolvency administrator attempts to find suitable evidence demonstrating your knowledge of the customer’s impending insolvency.
  • Burden of Proof: If a challenge is filed, you must present exculpatory evidence so that the challenge can be dismissed—this is possible only in the rarest of cases.

What costs will my company incur?

There is no one-size-fits-all answer to this question. The cost of insolvency challenge insurance is calculated based on business revenue, the number of delinquent payers, the agreed liability criteria, and the coverage amounts. The individual risk premium is then calculated based on these factors. If you have particularly high-risk revenue streams, you may also want to consider stand-alone insolvency contestation insurance. The higher the deductible, the lower the premium.

How does contestation insurance work?

  • In the event of an insolvency challenge: The first step is to retain an experienced attorney specializing in insolvency law to defend against the claims.
  • If the defense is unsuccessful: The compensation benefit’s performance guarantee takes effect.

The insurance coverage includes the costs of defending against claims for reimbursement (in particular, attorneys’ fees) as well as compensation payments for contested claims.

When is a creditor at a disadvantage—and how can I recognize impending insolvency?

Under the law, other creditors are placed at a disadvantage as soon as they become aware of their customer’s impending insolvency and nevertheless accept funds.

According to case law, imminent insolvency exists when a customer’s payments are “delayed.” This also applies when longer payment terms are granted, checks or direct debits bounce, installment payments are agreed upon (retroactively), or enforcement proceedings fail.

How long can legal transactions be challenged?

According to Section 133 of the Insolvency Code, legal transactions may be challenged retroactively for up to 4 years. Even customers with whom you no longer have a business relationship may cite grounds for challenging such transactions within the statutory time limits.

Standalone credit protection insurance or an add-on to credit insurance?

Insolvency contestation is available as a standalone policy, but can also be selected as a supplement to regular trade credit insurance. An overview of the options:

  • Stand-alone solution: Insurance coverage for all legally valid claims arising from entities that have not yet filed for bankruptcy as of the policy’s effective date
  • Exceptions: Receivables from rentals and leases; receivables from public-sector customers and private individuals
  • As a supplementary component of credit insurance: insurance coverage if the claim contested by the insolvency administrator was originally covered under the primary credit insurance contract

Conclusion: Contestation insurance protects against claims in the millions

Contestation insurance protects companies from claims for reimbursement by the insolvency administrator, which—depending on the customer—can amount to millions. It safeguards a company’s liquidity and offers stability and flexibility—either as a standalone solution or as an add-on to trade credit insurance.