USA - NATIONWIDE: An Introduction to Litigation Insurance Brokers

The litigation insurance marketplace has evolved considerably over the past year. At its core, the mission of this product line has not changed—the insurers participating in this market help policyholders use insurance to solve complex problems found at the intersection of business and legal risks. As detailed below, the difference lies in the types of solutions available in the marketplace and the number of participants offering each product.

While litigation insurance has certainly become more mainstream, it is still a developing product and, even for the well-initiated, it is helpful to step-back and understand what the insurance offerings are intended to accomplish. Prior to the advent of active litigation insurance, once a company or an individual had filed or received service of a lawsuit, they—potentially along with their counsel—were responsible for bearing the entirety of the risk of losing that dispute. Litigation insurance changed this paradigm by enabling the policyholder to shift a portion of this risk to the insurance markets. 

Types of Litigation Insurance & Use Cases

Litigation insurance is designed to help corporations and law firms better manage the financial risks presented by active litigation. For companies defending against a lawsuit or otherwise mitigating a known legal risk, it is difficult for the company to project (i) the realistic exposure from a lawsuit or known legal issue, and (ii) when that legal exposure might mature into a loss. For companies prosecuting litigation, it is similarly difficult to project (i) the value of the legal claim, and (ii) when the contingent asset (ie, the legal claim) might be paid by the defendant. All this breeds financial uncertainty.

There are four general types of litigation insurance that are designed to solve the uncertainty posed by active legal issues. In essence, the product helps take a contingent liability or asset (an unknown amount of loss/risk or unknown future contingent legal receivable) and restructures it as a known liability or known asset once an insurance company values what they predict the loss will be or what the contingent legal asset is worth. The main stays for this insurance market have been Judgment Preservation Insurance (“JPI”) and Adverse Judgment Insurance (“AJI”). While both of those products are still available at substantially reduced limits, the carriers have begun to focus more on developing insurance solutions around: (i) portfolios of lawsuits, and (ii) known legal risks that have not yet matured to active litigation (sometimes called “Specific Contingency Insurance”). 

Market Updates: Judgment Preservation Insurance and Adverse Judgment Insurance

Over the past year, the historical main stay in contingent insurance—JPI—has undergone significant transformation.  JPI policies “lock in” a portion of a trial damages award that is up on appeal. Insurers have suffered several material (actual or projected) losses in this product line, causing several to leave the market altogether. Those that still offer JPI have become hyper selective about which risks qualify for this coverage, reduced available limits, and restructured policies to better emphasize alignment of incentives.

Adverse judgment insurance has unfortunately been painted with the same brush. AJI is defence-side insurance that can limit a potential defendant’s exposure from pending or putative lawsuits. AJI policies are intended for legal risks that are potentially high-severity but have a low likelihood of resulting in a loss. It is for this reason that the ability of adverse judgment insurance to ring-fence the downside risk of existing litigation has proven to be particularly useful in the M&A context, where the existence of a contingent litigation liability may impede consummation of the deal itself.

While AJI policies have not suffered the same levels of loss, or indeed anything remotely comparable, carriers have been reluctant to underwrite these products as well.  A lot of this reluctance stems from the fact that, like JPI, AJI policies are underwriting a single legal event, which can be perceived as a binary risk. Notably, more carriers are currently willing to underwrite AJI than JPI. Successful placements for AJI policies emphasize alignment of incentives and structuring an insurance program that has multiple ways to take the carriers “off risk.” A skilled broker is essential to structuring the insurance program to optimise the likelihood that the carriers will underwrite and place this type of policy.

Market Growth: Portfolio Insurance

Over the past year, we have seen explosive growth in portfolio insurance opportunities. A growing group of carriers is willing to ensure that a policyholder will recover a portion of its investment across a portfolio of three or more high-value commercial lawsuits. Clients that procure this type of insurance are typically: (i) law firms working on a contingent fee basis; (ii) corporations pursuing costly commercial claims; or (iii) alternative investors. Litigation portfolio insurance is designed to help policyholders insure a substantial portion of current or future investments in a portfolio of cases. Clients have found this product to be a useful tool to provide certainty that they will at least recover all or a portion of their invested capital in the unlikely event that a litigation portfolio underperforms. Provided a portfolio survives the carrier’s thorough diligence process, these products have proven to be a very efficient means to help clients transfer a large portion of the legal risk associated with their investments.

Increased Appetite: Specific Contingency Policies

Specific contingency insurance is the catch-all insurance product for offerings that do not fit neatly into the above-referenced offerings. These placements mostly focus on legal risks that have not yet matured to the litigation stage. For example, a company developing a new product might insure the risk of a competitor filing an intellectual property infringement lawsuit in the future, alleging that the new product infringes the competitor’s patents. (In this scenario, at the time of procuring the insurance, the insured’s counsel would have analysed the competitor’s patents in light of the insured’s products and the competitor would not yet have asserted the patents against the insured.) Similarly, a company facing a regulatory issue—eg, the issuance of a permit—can transfer the downside risk of the permit not being granted. The policy indemnifies the policyholder if the permit is not granted and the policyholder suffers a loss. The insurance market has proven to be remarkably creative in figuring out how to use insurance to solve complex issues related to active litigation or regulatory risk. With the aforementioned losses in the JPI markets, the insurers have begun to focus extensively on underwriting and ensuring these types of alternative risks.

Future Developments in Litigation Insurance

While certain litigation insurance offerings are undergoing restructuring amidst recent setbacks, the larger litigation insurance market continues to experience exponential growth, fuelled largely by increased awareness of the product offerings and the seamless client experience offered by skilled brokers. Litigation insurance is becoming increasingly trusted and sophisticated each year. The opportunity for growth remains limitless as new types of legal risks continue to find their way to the litigation insurance marketplace. With insurers and brokers working to achieve appropriate risk selection, underwriting, and policy structuring, litigation insurance is poised to become a business necessity in the expensive and complex world of litigation.