What is a Clawback?

by Investing School on October 13, 2010

The word “clawback” refers to money that must be given back for some legitimate reasons. For example, it may refer the ability to recover cash that was invested into a project, even if it might have already been dispersed to sponsors. The clawback is the clause that allows these funds or benefits, funds that were previously distributed, to be taken back, because of the specific circumstances. These circumstances will be previously agreed upon and contractual.

The clawback term is especially applicable when referring to a tax benefit which was offered to a taxpayer, but that was tied to a requirement of special conditions… conditions that the taxpayer failed to meet. Because of the failure to meet the stipulations of the tax advantage, the taxpayer is then subject to a clawback.

In addition, previously paid insurance policy premiums premiums could end up being refunded (or “clawed back”) in the event that the insurance policy is cancelled – usually if this cancellation takes place within a specific and previously determined period of time. Again, an agreement like this one will be specified in the contract, and it is known in the industry as the “clawback provision.”

The clawback term may also be a reference to a retraction of stock prices, or a general retraction of the market overall. In some circles, any sudden drop of a stock price – especially one that comes directly after an increase – may be referred to as a “clawback” of the price.

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