Litigation can be expensive, unpredictable, and time-consuming. No matter the merits of the client’s arguments, prolonged litigation and potential liabilities can also cast a shadow over a company’s future. Even when companies have been awarded damages, an appeal by the counterparty could reduce or erode damages or delay a prevailing party’s ability to monetize the judgment and use the proceeds to grow the business. Fortunately, contingent legal risk insurance policies can provide protection to companies against potential legal risks associated with business operations. Legal risks can arise from various sources, including existing or anticipated litigation, contractual disputes, regulatory investigations, and intellectual property infringement.
While contingent legal risk insurance is a relatively new insurance product, we have seen a substantial increase in submissions over the past two years as clients and lawyers have gained a better understanding of the product.
Types of contingent legal risk insurance
Currently, contingent legal risk insurance policies fall into three categories: (i) adverse judgment insurance; (ii) judgment preservation insurance; and (iii) specific legal risk insurance. Below is a brief description of each type of insurance and how it can be used by companies:
1. Adverse judgment insurance policies are designed to protect defendants from the financial impact of a negative judgment in an existing or potential dispute.
2. Judgment preservation insurance policies are designed to protect an award issued to plaintiffs against the risk of reversal or reduction of the damages award in post-trial or on appeal. Clients may further utilize these policies to monetize lower court judgments via financing. In other words, these policies allow clients to benefit immediately from lower court awards by allowing clients the ability to “lock in” an award and seek financing at more attractive terms in the amount of the policy limits.
3. Specific legal risk insurance policies are designed to protect clients against a known legal issue that creates a potential legal exposure, e.g., permitting risks, missing, invalid or unenforceable provisions in agreements, etc.
These policies are typically customized to meet the specific needs of the insured. This means that the policy will be tailored to the specific legal risks that the company faces, ensuring that the coverage is relevant and effective. Some policies may provide coverage for specific types of legal disputes, while others may be broader in scope. Some policies may require the insured to pay a deductible or self-insured retention, while others may not. Insureds should work with dedicated contingent legal risk brokers to negotiate a policy specifically tailored for their needs.
Judgement preservation insurance for IP issues
Currently, roughly 40% or more of our submissions are IP-related and remaining submissions are spread across other commercial litigation risks.
While the amount of the submissions related to IP matters appears to be disproportionate to the overall number of litigations, given the value of IP damage awards and the uncertainty of appellate outcomes, judgment preservation policies provide a substantial value to parties engaged in IP litigation. In a patent infringement litigation, in a scenario where the client has obtained at $250 million judgment, the client may be able to procure a policy limit of up to $250 million to ensure the award in the event the Federal Circuit vacates the award and turns the value of the award to $0. In that context, an insurance policy could protect the client’s funds and P&L from a reversal or reduction in damages awarded.
Value-add of CLRI for small companies
As awareness of the product increases, buyers, sellers, brokers and lawyers are beginning to see value in using the tool. The product has seen huge growth in the US market, partly at least due to the litigious nature of the environment in the US; and requested insurance limits range from between $1m to $2bn. Europe is also experiencing growth, due to the sophistication of the market and the existing understanding of the product; submissions are slightly lower and tend to range between $10m to $300m. In Asia, the product has just started to take off but may take time to penetrate the market due to the economic, legal and political environment in certain countries.
Across the US and Europe, we are starting to see more sophisticated submissions. Recently, we have seen an uptick in strong submissions from smaller companies that are taking on larger players. While a bespoke policy can be expensive, it can help the business to monetize immediately without having to wait for the outcome of an appeal which may not go in their favor. In many cases, it also allows the business to free up funding to grow their business, money which had they been in long and drawn-out legal proceedings with an unknown outcome would have had to be held back in reserve.
As buyer activity increases, the contingent legal risk insurance product is evolving and our experience from multiple deals means it is becoming more flexible and able to meet specific client needs. Over the last year, for example, we have seen a considerable change in policy forms. However, as understanding of the product grows more significant changes are being made to meet the requirements requested by brokers. Reporting structures are also constantly evolving as more deals are written. The product is becoming extremely flexible, which makes it much more user friendly for clients.
