Broker Check

Litigation Risk Insurance

March 08, 2022

We have seen how social inflation is resulting in higher claim judgements, which in turn drive up liability insurance premiums. Plaintiffs and their attorneys are using litigation funding to pay court costs, forcing defendants to choose between settling claims which may have little or no merit, or risking judgements in excess of their insurance. On the other side, plaintiffs who win huge verdicts at trial risk having those awards reduced or reversed on appeal. In either case, claims may take years to be resolved.

To deal with these "litigation risk" scenarios, new forms of insurance have been developed. Matthew Grosack, Alex Gonzalez, Robert Hill and Leoine Huang describe them in an Insurance Journal article.

One of these coverages is adverse judgement insurance. It does not cover defense or settlement costs but would cover judgments after trial pending appeal. This allows defendants to limit their risks.

Another coverage is  judgement preservation insurance. This is for successful plaintiffs facing the risk  that a large judgment will be reduced or reversed on appeal.

In both these cases, the object is to reduce uncertainty about litigation outcomes that could affect a company's balance sheet or complicate a merger or acquisition. They would also be attractive to companies in industries where large lawsuits are common.

These types of policies would be subject to large retentions (either underlying liability insurance or self-funded) and probably high premiums considering their limits. Policies are individually underwritten with manuscript or "bespoke" terms tailored to specific circumstances. The Insurance Journal article did not state which insurers write this coverage, but the most likely markets are large surplus lines carriers.

Anyone interested in this coverage should contact their broker and prepare for a long underwriting process.