Adapted from Steven Penaro, Kristen Kuan and Jenna Jones, Insurance Journal
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.
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