Contingent Risk Insurance: What Is It and Just How ‘Risky’ Is It?

Litigation, by its very nature, is uncertain. Even the most seasoned practitioner or skilled jurist cannot guarantee an outcome or assure a result. Fortunately, however, the insurance markets have increasingly been engaged to mitigate downside exposure of litigation’s inherent uncertainty. Through the proliferation of contingent risk insurance, businesses and individuals can now mitigate that downside risk by preventing potential windfall losses, locking in a substantial portion of a damages award, and even monetizing a judgment before lengthy appellate proceedings conclude. The impact of contingent risk insurance, if deployed correctly, can be profound. And, keeping in mind certain key considerations during the underwriting process will help insurers appropriately issue policies designed to provide maximum value to both insurers and insureds.

What Is Contingent Risk Insurance?

Contingent risk insurance offers protection from identified legal risks, allowing companies and individuals to minimize or eliminate their risk exposure and better manage risk associated with the uncertainties of high-stakes litigation.

Contingent risk insurance most commonly takes two forms: adverse judgment insurance and judgment preservation insurance.

Adverse judgment insurance typically protects defendants in pending litigations. In short, it allows an insured to box in litigation exposure and transfer that risk to the insurance markets.

When purchasing adverse judgment insurance, the insured pays a premium in return for the insurer paying any subsequent loss exceeding the retention up to the limit of liability from an adverse judgment. With adverse judgment insurance, the insured typically must exhaust all appellate options before the insurance pays out.

Judgment preservation insurance, as the name suggests, protects the prevailing individual or business against the risk of a judgment being reversed or overturned, or the damages award itself getting reduced on appeal. In short, this category of insurance allows plaintiffs to preserve damages awards pending appeal. Judgment preservation insurance protects the judgment creditor from the possibility that a certain portion of a damages award may get reversed in whole or in part.

Benefits of Contingent Risk Insurance

As can be gleaned from the above, contingent risk insurance is beneficial to any business or individual looking to protect themselves from the potential harm of an adverse decision or the potential for downside monetary exposure while litigation is pending. Examples of such benefits include:

• Removing litigation roadblocks from transactions, including high-stakes M&A transactions;
• Releasing corporate funds previously set aside to pay out a potential damages award;
• Reducing litigation uncertainty for public companies involved in litigation, creating more shareholder confidence and a corresponding increase in stock price; and
• Allowing businesses and individuals to monetize judgment-related earnings before the judgment becomes final, providing the judgment holder access to the monetary benefit of the award before the appellate process concludes.

Underwriting Considerations

Every contingent risk insurance plan will need to be tailored to the specific facts and legal considerations at issue. As a result, each potential underwriter needs to carefully evaluate all the risks and considerations from a legal perspective. Despite the unique nature of each risk being underwritten, there are several common considerations that underwriters should be mindful of when determining exactly how “risky” the contingent risk may be.

The developed record is an important consideration in conducting an underwriting analysis. If, for example, a case has progressed through a significant amount of discovery or if it has had one or more dispositive rulings in favor of the potential insured, an insurer will be able to conduct a more robust review of the case and properly examine any applicable legal theories — all of which may lead to the insurer becoming more comfortable with a specific risk. On the other hand, cases that are in their preliminary stages may not be good candidates for litigation risk insurance because there could be a lack of information about the facts, potential legal theories, or reasonably likely outcomes in the case.

The forum of the litigation is also a key factor to examine. Not every legal forum is created equal. For instance, the U.S. District Court for the Western District of Texas is the busiest district court for patent cases, followed by the District of Delaware. The Western District of Texas has become an increasingly popular venue because of default schedules and standing orders, which keep patent cases moving quickly and on a pre-determined timeline.

On the flip side, certain courts are known for having slower than usual dockets. For example, the District of Delaware, Eastern District of New York, and Southern District of California had some of the slowest dockets in 2021. Conversely, the Eastern District of Virginia, sometimes referred to as a “rocket docket,” has the fastest federal civil trial court. The Eastern District of Virginia is also becoming an increasingly popular venue for Chapter 11 cases.

Unsurprisingly, dockets that move on a faster timeline may be a more favorable risk to an insurer since these cases tend to have more developed records that allow underwriters to make more thorough assessments. Indeed, an underwriter familiar with the intricates of the forum is better positioned to assess the timeline, legal theories and potential range of outcomes of the litigation.

Familiarity with the subject matter of a litigation can lead to a more streamlined and accurate evaluation of the risk. For instance, familiarity with recent legal developments in rapidly evolving areas of the law can help separate the good risks from the bad. The ability to quickly analyze emerging legal trends and identify legal issues and theories that have become stale or recently overturned are important considerations that will enable an underwriter to appropriately evaluate a risk.

As noted above, cases that involve legal issues with a robust discovery record, including commercial litigations and patent litigations, lend themselves to a more thorough underwriting process. In these types of cases, the amount of potential damages, or the possibility for reductions in damages, can be more accurately determined. On the other hand, cases that are in the pre-discovery stage may be less suitable for contingent risk insurance because underwriters do not have a robust record to thoroughly evaluate the factual and legal issues of the case. Likewise, tort cases, such as personal injury or medical malpractice cases, may not be the best candidates for contingent risk insurance because these cases tend to run the risk of surprising runaway jury verdicts.

Counsel for the Potential Insured

Finally, it is important to consider whether the counsel for the potential insured has thoroughly vetted their claims or defenses. For example, counsel that takes on a case on a contingency basis after conducting a thorough evaluation of the factual and legal issues of the case can often signify the perceived strength of a party’s claims or defenses. Cases where the counsel for the potential insured has conducted a robust analysis before the underwriting process can often be a more favorable risk.

While litigation is inherently risky, these are key considerations that all underwriters should keep in mind when determining whether the litigation is a good candidate for contingent risk insurance.