Lawyers are always looking for ways to finalize positive outcomes in litigation, where even after winning a trial court judgment, lawsuits can drag on for long periods of time, often two to three years or longer.
For companies, protracted litigation can become a reporting and fiscal challenge, and not just because of the ongoing legal fees incurred in litigating the case. Consider the situation of a company who takes a case to court as a plaintiff. It could be a case of any type: for example, breach of contract, patent infringement, or fraud, but let’s assume that they subsequently have success in their suit and are awarded a sizeable award at trial.
The company cannot include the money within their P&L, they cannot account for it within planned income, and they cannot even access it while the defendant appeals – which of course, in the case of a sizeable award, is inevitable. In other words, the judgment is uncertain and illiquid for years to come.
This leaves the company stuck, resting alongside their lawyers in limbo. The issues are such that they can prevent companies from taking on litigation in the first place or lead companies to settle for pennies on the dollar in order to take appeal risks off the table.
In recent years, however, judgment preservation insurance has become an increasingly well-received alternative to this challenging situation. Let’s imagine a situation in which Company A has felt themselves harmed, has gone to trial, and has won an award of $100m from a competitor over a contract dispute. The competitor launches an appeal, and the award is frozen for 1, 2, 3 years or more. However, Company A wishes to “lock in” the award, remove the inherent risks of an appeal, and have the benefit of access to the $100m immediately.
The company decides to ask their broker to arrange judgment preservation insurance with the aim of securing their capital. They pay Insurer B $10m for a judgment preservation policy preserving their $100m judgment.
Here are some possible outcomes for Company A. In the event the appellate court rules in their favor, their award will remain at a gross amount of $100m, but the net recovery will drop to $90m because of the cost of buying the insurance. However, if the award drops to $20m, Company A will receive $20m from the defendant and $80m in the form of a payout by Insurer B. After accounting for the insurance premium, they will still end up with a net recovery of $90m. In other words, no matter how the appeal plays out, Company A will walk away with a net recovery of $90m.
In most cases like this it makes complete sense for the company to swallow a small reduction in their overall award in order to deliver certainty about the ultimate amount they will receive. This allows them to book the money into P&L and to borrow against it if needed. It may be that they need the money to fight “on the ground” against the competitor who has breached the contract, or to fund expansion that would otherwise have had to wait. Almost inevitably, however, the results are beneficial to the company. As a result of judgment preservation insurance, that uncertain and illiquid judgment is now certain and liquid.
There are also occasions, increasingly, where the buyer of the insurance is a law firm acting on risk. In one example in the US, we were part of an insurance program where a law firm obtained a significant attorney fee award after successfully litigating a case to judgment. Certain members of the class objected to the attorney fee award, which meant a lengthy appeal process would follow. Rather than wait years for the appeal to be resolved, the law firm purchased an insurance policy to respond in the event the attorney fee award was reduced below a certain amount on appeal. While there was a remote risk of the fee award being reduced on appeal, the law firm wanted to disburse the fee award to its existing partnership immediately. It would have been a headache in the event the firm had to repay a portion of fee award 1-2 years down the line given the turnover among the firm partnership. As a result, the law firm purchased a form of a judgment preservation insurance policy which guaranteed them more than 90% of their fee award, no matter the outcome of the fee dispute on appeal. This allowed the firm to immediately distribute the fee award to its partnership, rather than holding the money back for what might have been a long period of time.
There are also instances where a defendant purchases a judgment preservation insurance policy, which is often overlooked in the marketplace. In one example, a company was in the process of developing a commercial property. A claimant, a former owner of the property, filed suit against the company, alleging that it retained an interest in the property. The dispute went to trial and the company won a defense-side judgment in which the court held that the claimant had no interest in the property. The claimant filed an appeal. The company was in the process of obtaining financing for development of the property. There was a low probability but high severity risk that the judgment would be reversed, causing delays in the construction and potentially triggering an event of default under the construction loan. A defense-side judgment preservation policy can be used in this situation to protect a defendant from the loss flowing from judgment reversal.
Judgment preservation policies make a whole lot of sense for both the insurer and the insureds. From our perspective as the insurer, the facts of the case are established, the record is finite, and the legal issues have been extensively vetted in the trial court. It is worth noting that very often on appeal, certain issues are subject to a deferential standard of review, meaning the court places a thumb on the scale in favor of affirming the original judgment.
Meanwhile, from the insured’s perspective, the prospect of living through an appeal with “all to play for” is unattractive and unnecessarily risky. A judgment preservation policy takes that unnecessary risk off the table, as insurers are better suited to spread the risk across a portfolio of cases. It can also allow the company to move forward if it wants to ”lock in” a portion of the award. Brokers now work with a variety of hedge funds and capital providers who are willing to provide financing to companies who have a judgment preservation policy in place.
This is a truly specialist sort of insurance policy and only a handful are written each year. There are few insurance brokers and insurers who specialize in judgment preservation insurance, with Liberty GTS being one of those insurers. Liberty GTS has one of the largest teams of dedicated underwriters focused on underwriting judgment preservation insurance risks with experience in both common law and civil law systems across a broad range of disputes, which helps us to connect with the legal teams working on the cases we insure.
It is important to realize that this sort of bespoke policy is often extremely high in value and can help a company realize very significant sums. On multiple risks last year, judgment preservation policies were purchased on judgments exceeding $1bn. Through judgment preservation insurance, insureds were able to monetize over $700m on each of these risks.
Increased use of the product has been very much driven by the growing size of judgments, especially in the intellectual property space, as well as the growing familiarity of the product. Yet many in-house attorneys and litigators at the biggest law firms in the US still are not familiar with the product.
So, as an underwriter, my message for companies, law firms, private equity firms, and investors is therefore straightforward. Start to understand and consider how to use new tools such as judgment preservation insurance and other contingent legal risk insurance offerings. Think outside the box as markets like Liberty GTS are willing and interested in exploring creative solutions to deal with known but uncertain legal risks and the opportunities are nearly limitless. Connect with a broker who can package these risks. Insurance tools such as judgment preservation insurance are here to stay, and all litigators and their clients can greatly benefit from understanding and using these tools.