Contingency clawback — the income that isn't fully earned.

Contingency income looks like earned revenue on the P&L, but for a book with a clawback provision it's provisional — exposed to the next year's claims experience until the subsequent contract year closes. A carrier can recapture some or all of a prior-year bonus if a multi-year loss-ratio average breaches the threshold, which means a buyer who capitalizes a target's contingency at face value may be paying for income the carrier can take back. The exposure is common, it's documented, and it hides in plain sight in contract language nobody re-reads.

§ 01 · Three clawback variantsHow recapture works.

The typical clawback is a multi-year loss-ratio trigger — a rolling 2- or 3-year window where, if the average exceeds the carrier's threshold, the carrier recaptures some or all of a prior-year bonus. It comes in three forms. A rolling-window test partially recoups if the multi-year average exceeds the target. A hard reversal returns the entire prior-year payout if the current year breaches a disqualification threshold — the most severe. And a loss-corridor reduces but doesn't fully reverse: losses above a specified band shave the prior contingency without zeroing it. The variant matters because it sets the magnitude of the exposure a buyer inherits, which is why the clawback provision has to be read at the variant level, not just noted as "present."

§ 02 · Provisional, not earnedAnd hiding in the contract.

The reframe that matters is that reported contingency is provisional income. It sits on the P&L as revenue, but a clawback provision keeps it exposed to the next year's claims until the subsequent contract year closes — so a buyer capitalizing it at a multiple is capitalizing income that can still be partially recaptured. The reason it's so often missed is that the language is camouflaged: clawback provisions sit under anodyne headings and read as boilerplate, and most agency owners haven't read their contingency contracts recently — many signed five to ten years ago and renewed without a fresh legal review, so the provision is in the file but has never been surfaced. The carrier-diligence taxonomy of clawbacks (cancellation, loss-ratio, and compliance variants) is covered from that lens in carrier clawback provisions; here the focus is the contingency exposure a buyer prices.

§ 03 · The exposure and the auditSizing it for valuation.

Rolling clawback exposure of 20%–30% is common, and it gets handled in valuation one of two ways: a modest discount to the multiple, or an enterprise value that includes a reserve line reflecting the expected clawback across the rolling window. The single strongest signal that the provision is real and active is historical experience — any carrier that issued a clawback in the prior five years confirms both the mechanical existence of the provision and its active application, which moves it from theoretical to priced. For a seller preparing to list, the move is a three-step audit, ideally six months out: pull every active contingency agreement plus amendments and side letters; map the exposure (the trigger, the look-back window, the maximum recapture, and the current-year loss-ratio position); and consider remediation, since some carriers will renegotiate clawback removal or modification for longer-term partners. Surfacing the exposure is more defensible than hiding it — "90% of our contingency is unconditional; 10% carries a 3-year rolling clawback" is a far stronger position than silence that a buyer's diligence will eventually break.

§ 04 · Buyer asks and protectionsStructuring around the exposure.

On the buyer side, the diligence asks are specific and the protections are structural. Ask for every active contingency contract, every amendment and side letter, and the seller's written clawback summary — but have independent buyer's counsel review the contracts directly rather than relying solely on the seller's summary, because a clawback misread is a number on the balance sheet that can reverse. Two acquisition-agreement mechanisms protect the buyer from inherited exposure: a representation-and-warranty carve-out protecting the buyer from pre-close clawback on already-paid contingency, and an escrow holdback sized to the clawback exposure so the funds are available if the carrier recaptures. Together they convert provisional income from a hidden risk into a priced, structured term. Read the variant, size the rolling exposure, confirm it against historical clawback experience, and back it with a carve-out and escrow — that's how a buyer keeps a clawback from turning capitalized contingency into a post-close loss. Where this contingency-quality work fits in the full DD sequence is in contingency-income benchmarks.

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