Definition of basket deductible


What is a basket deductible?

A basket deductible is a single deductible that is designed to finance losses from multiple types of risks. For example, common types of business insurance (property and general liability) protect against completely different types of loss exposures.

Businesses looking to reduce the risk associated with business transactions, such as a merger or acquisition, typically use a basket deductible, outlining the award and indicating the point at which the seller of the business may be liable for claims.

A basket deductible is similar to the concept of a deductible in an insurance policy. An insurance company defines a deductible on your insurance policy; In a business purchase agreement, the basket deductible specifies the dollar amount of the buyer’s post-closing claims that must be exceeded before the buyer can request a refund for the seller’s claim.

Key takeaways

  • A basket deductible is a single deductible that is designed to finance losses from multiple types of risks.
  • Businesses looking to reduce the risk associated with business transactions, such as a merger or acquisition, typically use a basket deductible, outlining the award and indicating the point at which the seller of the business may be liable for claims.
  • Companies can agree to use a basket deductible when going through a merger or acquisition.
  • The amount of the basket deductible is determined during the purchase process and is often included in the purchase agreement.
  • Using a basket deductible makes the buying process easier because it combines all the different risks inherent in buying from another company into one deductible; in addition, it provides a level of protection to the seller.

How a basket deductible works

A basket deductible limits indemnification obligations in order to prevent an indemnifying party from being liable for inaccuracies or breaches of certain statements until losses exceed a specified minimum amount.

Companies can agree to use a basket deductible when going through a merger or acquisition. The amount of the basket deductible is determined during the purchase process and is often included in the purchase agreement.

Using a basket deductible makes the buying process easier because it combines all the different risks inherent in buying from another company into one deductible; in addition, it provides a level of protection to the seller. The party selling the business wants a high deductible because it reduces their exposure to claim losses, while the buyer prefers a lower deductible because they want to use the amount in the negotiation process.

Basket deductibles work by combining the different material risks that a buyer can experience from claims made after the purchase is completed, called post-closing claims. If the specific amount of the deductible is not met, the buyer is responsible for the cost of the claims. If the amount of the claims exceeds what is agreed between the buyer and the seller, the buyer can request a refund from the seller for the excess loss.

Basket deductible vs. tip deductible

Basket deductibles differ from tip deductibles, which can also be used in purchase agreements. Both the basket deductible and the tip deductible are called indemnity baskets (in the context of purchase agreements).

Once a specific limit is reached on a deal that includes a tip basket, the seller will be liable for all claims (not just claims up to a point, as is the case with basket deductibles).

For example, several months after purchasing a business, the buyer believes there are $ 600,000 in claims for which the seller should be liable. If using a basket deductible capped at $ 500,000, the buyer can only pursue the seller for additional funds if the total claims exceed $ 500,000. (In this case, $ 100,000 ($ 600,000 in claims minus the $ 500,000 deductible limit).)

Any amount greater than $ 500,000 will be the responsibility of the seller. In the case of a tip basket capped at $ 500,000, any claim that raises the total to more than $ 500,000 would require the seller to pay the claim in full. Since the total amount of the claims is $ 600,000, the seller would be liable for the total amount of $ 600,000.

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Mark Holland

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