Can be divided into categories of specific legal risk and generic legal risk.
Specific legal risk is the chance, for example, that a contract between two
parties would be considered unenforceable under the controlling legal authority
(e.g., a contract involving the commission of a crime). Generic legal risk involves
situations where there is no clear, controlling legal authority or where the
law is unsettled on a particular issue. Catastrophe bonds and other recently
developed insurance derivatives face generic legal risk because the legal and
regulatory environment affecting these instruments is not yet subject to any
clearly defined controlling authority (e.g., should a "cat" bond be regulated
as insurance, an investment, or both?).