FAQ – Contestation Insurance
FAQ - Contestation Insurance
Here you’ll find answers to the most important questions.
1. General Information / Definition
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.
Why does a challenge pose a risk to my company in the first place?
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.
For which companies is contestation insurance suitable?
Insolvency Challenge Insurance is suitable for all businesses that want to protect themselves from the financial consequences of a potential insolvency challenge. After all, any company that generates revenue and receives information about a negative situation could be affected. This insurance can be worthwhile even for small and medium-sized businesses—many providers offer specialized coverage for SMEs.
What are the benefits of contestation insurance?
- Additional protection against the consequences of a potential insolvency challenge
- Ensuring Corporate Liquidity
- Stability
- Flexibility
Why should I purchase contestation insurance for my business?
Facts About Insolvency Challenges:
Long chases:
Legally, payments made up to 4 years before the commencement of insolvency proceedings and up to 3 years during the ongoing insolvency proceedings may be challenged.
Assumption of pre-existing insolvency:
The insolvency administrator is trying to find suitable evidence to demonstrate that you were aware 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.
2. Costs
How much does contestation insurance cost for my business?
There is no one-size-fits-all answer to this question. The cost of contestation insurance is calculated based on:
- business revenue
- the number of delinquent payers
- the agreed liability criteria
- the insured amounts
This is used to calculate your individual risk premium. If you have particularly high-risk sources of income, you may also want to consider stand-alone insolvency avoidance insurance. The higher the deductible, the lower the premium.
3. Terms of the Contract
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 fails: The compensation benefit’s performance guarantee takes effect
What does the insurance coverage include?
- Costs incurred in defending against claims for repayment (particularly attorneys’ fees)
- Compensation Payments for Disputed Claims
What conditions must be met for the insolvency trustee to be able to recover funds?
As soon as the insolvency administrator has reason to believe that other creditors of the debtor have been disadvantaged, he is authorized to challenge prior legal transactions and demand the return of funds.
In what circumstances is a creditor disadvantaged?
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.
How can you tell if a customer is at risk of insolvency?
According to case law, a risk of 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.
Until what point in time can legal transactions be retroactively challenged?
According to Section 133 of the Insolvency Code, legal transactions may be challenged retroactively for up to 4 years.
Can former customers also dispute sales from the past 4 years?
Yes, even customers with whom you no longer have a business relationship can cite grounds for contesting a transaction within the statutory time limits.
In which countries can claims be filed?
As a general rule, claims can be filed in the European Union, the United States, Canada, and Switzerland.
Can insolvency avoidance be used as a supplement to trade credit insurance?
Yes, this is possible. Insolvency coverage is available as a standalone policy, but it can also be selected as a supplement to a standard trade credit insurance policy.
What is the difference between standalone insolvency contestation insurance and insolvency contestation insurance offered as an add-on to credit insurance?
- Stand-alone solution: Insurance coverage for all legally valid claims arising from entities that had not yet filed for bankruptcy at the time the policy was issued
- Exceptions: Receivables from rentals and leases; receivables from public-sector customers and private individuals
- As a supplementary provision of the credit insurance policy: Insurance coverage if the claim contested by the insolvency administrator was originally covered under the primary credit insurance contract as well
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If you have any further questions about contestation insurance, please contact us.
