1. What is a contingent risk?
Shai Silverman (Moderator): We’re excited to talk about contingent risk insurance among this group, which has a great deal of experience in the industry. Two of us do the brokering and two of us do the underwriting, so we have perspectives from both key angles in this space. The goal here is to provide an understanding of the basics of contingent risk insurance. I’ll turn first to Megan to talk us through what contingent risk insurance covers.
Megan Easley: When we say “contingent risk” — sometimes called “litigation risk” — what we’re referring to is a known, identified risk. It’s a known, active issue. An ongoing dispute. It could be litigation or arbitration or a claim that’s been asserted. This is different from the other side of the broader transactional liability universe, which deals with unknown and unidentified risks. For this discussion we’re going to focus on litigation and dispute-related risk.
“One of the hallmarks I’ve seen in the industry as it’s evolved is a growing sophistication of thinking about how these products can operate across books of business or portfolios.”
Vice President, Contingent Risk
2. Who can use contingent risk insurance?
Silverman: Nicole, could you talk us through who you often see as potential counterparties or policyholders for this product?
Nicole Barna: It can be any entity or individual that has an interest in the litigation.
Taking a step back, five years ago, the way people thought about this space was primarily from the defense side, in the M&A transactional liability space where a known risk or litigation had come up during diligence. As a known risk it’s excluded from representation and warranty coverage. And perhaps it’s something that has a very remote but very outsized potential of ultimate exposure. So, parties would turn to the contingent and litigation risk markets to try and get insurance for that specific risk.
This space has rapidly evolved as more and more people become aware of the product. There are a lot of creative underwriters and brokers in this space, thinking about who has an interest in the litigation and how to insure that.
We’ve now entered a period where we see a lot of demand on the plaintiff side as well. Their interest, usually from a law firm perspective, is working on contingency and the unpaid fees that they incur during this time. From a funder perspective, it’s the investment in a litigation where they’re expecting to produce an ultimate return. Or from a judgment preservation perspective, the interest is in preserving the ultimate judgment against the risk of it being overturned on appeal.
Silverman: Bryce, does that comport with your experience as well?
Bryce Guingrich: Yes, I completely agree. In the last several years, the product was less known in terms of understanding the pricing, and what could be insured was also not quite fully understood by potential insureds. Brokers have worked hard to explain this product and how it works to clients — what they should expect, what is doable, and what is not.
As Nicole said, initially, a lot of these products came out of M&A transactions where there was an outside motivation to offload risk. But it wasn’t just pure risk transfer — another reason was to get the deal done. Maybe one side thinks it’s going to be 10% of the alleged claim and the other side says it could be ten times that. So, we have to make sure that that liability is accounted for, or else it blows the entire investment.
There’s been a huge uptick in the last couple of years, given it can take years to collect on a judgment. But if you can get the value that your company needs now to keep growing, potentially, it can get that judgment and use that insurance policy as collateral for a loan. There are a lot of different levers to pull with upfront premium, potentially even sharing in the upside, how you offset judgments against costs on other matters. We’re just at the forefront of discovering that right now.
Judgment Preservation Insurance
Silverman: It’s exciting times. You touched on a few of the products we see. We’re at a moment of real innovation in this industry. Let’s talk through some of the products that have been successful in serving clients’ interests and building the industry. Megan, tell us a little about how plaintiffs can benefit from judgment preservation, as an example.
Easley: As brokers, we see a lot of plaintiffs looking for judgment preservation insurance. If you get a judgment at trial of $10 million, you’re probably facing a couple of years of appeal, and some risk on appeal. If you’d rather lock in certainty and potentially monetize the judgment earlier, you can secure coverage providing that, after all the appeals are done, you will have a final judgment of the amount of your insurance limits. Say the limits are for the full $10 million. If for some reason, on appeal, or after remand, your judgment is reduced to $5 million, the insurance would cover that difference.
Silverman: One of the hallmarks I’ve seen in the industry as it’s evolved is a growing sophistication of thinking about how these products can operate across books of business or portfolios. Nicole, could you talk about how the portfolio side works?
Barna: The portfolio side is one way of addressing roughly the exact opposite of the judgment preservation risk in earlier-stage litigation. Early-stage litigation is a more difficult insurance to write. Sometimes it’s pre-complaint, pre-discovery. So, while those products are available and do exist, the case has to be right, the partners have to be right, and these products are more expensive.
A way to potentially address that and make this a more marketable product is on a portfolio basis. I view the portfolios falling into two different buckets. One is a portfolio of defined cases that can be individually underwritten. That provides us with a great deal of comfort because usually we would not pay a loss until the final resolution of all of the matters in the portfolio, and therefore you have the protection of multiple off-ramps. We love a portfolio where any one win could de-risk the entire insurance. That’s not necessarily required, but we take that all into consideration when we’re talking about structure and pricing.
The second kind of portfolio risk is more commonly referred to as a “wrap” or a “wrapper.” We see requests for these from law firms or funders looking to essentially put an insurance wrap around an entire fund or portfolio of cases. Usually when you hear the word “fund” or “wrapper,” the cases have not been determined yet and they will subsequently be “put into” the wrap as the investments take place. These tend to be very large, diversified portfolios, so the benefit to the carriers is that the risk of loss is quite remote.
IP and Defense-Side Insurance
Silverman: Bryce, could you talk us through how some of the defense-side policies work and what the products are on that end? Also, given your expertise, could you talk about the successful use of this product in the IP industry?
Guingrich: On the IP side it’s been largely judgment preservation matters so far. And it’s important to keep in mind, on some of these IP judgments — let’s say somebody has a $100 judgment, just to simplify things — it’s really not about insuring all $100 necessarily, although that can be done. If there’s part of that judgment that is more susceptible to being overturned on appeal, or even reduced on remand to, for example, 30% of the judgment, it’s to insure the most solid part of the judgment.
On the defense side, an allegation has been made against the insured; you often are at an informational disadvantage, because you don’t really know yet what the defenses are. And the allegations may be extremely broadly stated. Plaintiffs’ firms tend to go quite aggressive on their language, alleging fraud and all sorts of things.
So early on it can be quite difficult, because the only way to bridge the gap prior to discovery is through a rep letter where the insured is making representations that certain things have happened or did not happen. After discovery, at summary judgment, you get increasing clarity. The more certainty you have, the easier it is to insure.
“There are a lot of creative underwriters and brokers in this space, thinking about who has an interest in the litigation and how to insure that.”
Executive Vice President and Underwriting Counsel
Arcadian Risk Capital
3. Why should someone use contingent risk insurance?
Silverman: Let’s talk the why. Nicole, what’s the fundamental reason someone wants contingent risk insurance, in your view as an underwriter?
Barna: The insured is essentially looking to manage or mitigate their downside exposure. Whether that’s a portion of their investment or a reduction of their award on appeal, the insurance therefore serves a purpose in taking away some of that downside risk.
A common theme here when structuring these policies is, regardless of the party, you always want them to maintain skin in the game. We’re not here to take all the downside exposure; we’re here for the worst-case scenario.
Silverman: As is the case in any insurance situation. Bryce, what are some of the motivations that strike an underwriter as particularly good reasons why or why not to provide insurance?
Guingrich: Insurers historically put in place a policy to protect against future risks. The reason rates are different here is that you’re taking on a live liability. What motivates a company to accept some monetary payment for a live liability that another company could also have? The best reasons we have are when there’s a third reason, for example, there’s a transaction that needs to get done. This facilitates it. It bridges the gap.
Another reason would be a company has to have a reserve on its books for potential liability, and that has hampered cash. Therefore, they can’t grow, or they can’t use their funds as they need to. So, they can take that reserve down, or remove it altogether, with an insurance policy. That’s a great motivator. On the plaintiff side, it can be reducing the cost of capital by having insurance to get more certainty for investors.
Silverman: We heard from the underwriters about what they’d like to see. Megan, could you describe some things you hear from clients about why they’re seeking insurance in the first place?
Easley: People come to us to help them take a contingent legal asset that is either on appeal, or that’s ongoing, and that’s not sufficiently secure to borrow against on a favorable basis. Once you get an insurance policy in place, you can borrow against that policy in a much more favorable setting. So, one thing in particular that we do at CAC is we offer our own investment banking arm, Dorset Peak, and we work with clients to simultaneously place insurance and set up a lending facility with that insurance as the backing.
Say you have, in the judgment preservation context, a $10 million judgment that’s up on appeal. You might have two or three years before you’re at a final judgment stage and you’re actually going to see that money. A traditional bank doesn’t really know how to evaluate an asset like that. It’s not their bread and butter. But if you can say to the bank, “I have this insurance policy in place, and insurance is going to make up the difference,” you have a much more secure and understandable asset, and you can borrow on a much more favorable basis.
4. How does contingent risk insurance work?
Silverman: We’ve talked about the who, the what, and the why. Let’s talk about the how. How does this insurance actually work? What do these policies look like? Nicole?
Barna: These policies are highly bespoke and very manuscripted. They look a lot different than more traditional insurance products like D&O, in that they are much more streamlined. You’re not going to find a 70-page policy with 45 different endorsements. And that’s because we’re covering a known exposure — we know exactly what our risk factors are, we know exactly what the coverage trigger is, and we are not looking to cover every possible fortuitous eventuality, like more traditional insurance seeks to do.
That said, these are still insurance policies. They are not bonds that are payable on demand; they do have terms and conditions and obligations in them. But they are much more straightforward than you would find in a typical insurance policy. Judgment preservation insurance policies are probably the most standardized, just because that’s the most established type of litigation insurance. It’s also probably the most straightforward from a coverage perspective.
So, again: streamlined and manuscripted. Our counterparties on these deals are often lawyers, so there are many turns back and forth even with this streamlined coverage. Most every contingent market in this space does have the in-house capability to take concepts and put them into policy wording quite quickly and efficiently, which is essential.
Silverman: Bryce, can you talk us through what the exclusions look like in these policies generally?
Guingrich: That really dovetails off the sort of simplicity of the form that we’re talking about. There’s a natural reason for that. Other insurance products — where you’re covering an unknown event in the future that is described as something like a wrongful act — those policies are extremely long and can be attenuated because you’re saying, “we’re going to cover everything, but this is a list of all the things we’re not going to cover.” Here, it’s the opposite of that. You have a single issue that is discrete, that you can describe. You’re covering in the affirmative, instead of a very broad definition with exceptions, and sometimes a lengthy list of exceptions.
In this context, the case itself would be identified in the insuring agreement. The exclusions are typically very short. Fraud is the basic one, because you can’t insure fraud by law in most jurisdictions, unless there’s a party that is not a beneficiary to the insurance in some way. In these policies, the crux of the provisions is whether there’s a coverage dispute, something that’s extremely rare in these products.
“Brokers have worked hard to explain this product and how it works to clients — what they should expect, what is doable, and what is not.”
Chief Underwriting Officer
VALE Insurance Partners
5. What makes a contingent risk insurable?
Silverman: Our job as brokers is to advise clients as to whether it’s likely they can obtain insurance. Nicole and Bryce, what are some of the things you’re looking for in a risk to decide whether it’s attractive enough for you to insure it?
Barna: In this space, you learn very quickly not to put yourself in too many boxes, because the minute you say “all of my risks have this one particular characteristic,” the next one will prove you wrong. And it certainly depends on what you’re looking at. Is this a judgment preservation insurance risk? Where’s it going on appeal? Is this an earlier-stage litigation? What is the subject matter? These things are all relevant for consideration.
The further advanced a case is, the more there is for us to underwrite. There can be an entire underlying record, so we have a higher level of confidence, and this is reflected in the pricing for these risks. On an appellate risk, standards of review and jurisdiction are also relevant. What does the opinion look like? Is it a well-reasoned opinion? Was it a jury trial? Was it a bench trial? All of these things come into consideration.
Brokers are a really great source of pre-vetting those considerations, knowing the markets and knowing our general appetites and little quirks. I find that to be very helpful, because we can have confidence that the things that reach our desks meet those indices of a solid risk.
An opinion from counsel is also always enormously helpful. You’re hearing from people who’ve been dealing with this for probably at least a year. We need a little help getting up to speed in quick and efficient fashion. It can come from the litigants’ counsel, or even better if it comes from an independent source — for example, if the funders already procured an outside opinion — because that’s another indication of reliability.
Silverman: Bryce, do you have any other thoughts or additions to that?
Guingrich: Sometimes we get a two- or three-paragraph description of a concept, but it doesn’t really identify the discrete legal issue. Sometimes we’ll get the whole docket; that’s the other worst case. Most underwriters don’t have time to look at that. That means it’s going to go to the absolute bottom of the list, if they ever get to it at all, because it’s not packaged up in something that they can read and use to establish comfort.
What you’re really looking for in the initial stages are fairly discrete legal issues. Then you can always go to outside counsel to firm that up. You don’t want to get the insured and the broker doing a bunch of work and getting new materials and write-ups on stuff that you can’t get across the line. The more clearly the legal issue can be identified, the better.
Easley: I’ll add that we view our role as being the ones who comb through these stacks of documents, look through the whole docket, really dig into the case. We’ll do that deep dive to give clients our feedback very quickly, because we don’t want to waste anyone’s time — not the client’s, and not the carrier’s and underwriter’s — looking at something that’s not going to be insurable.
Ultimately, we build a very detailed submission to send to folks like Nicole and Bryce so that they can understand at least how we see the case and the risks we’ve been able to identify. That way they know that someone has already taken a deep look at the matter.
6. What is the process for obtaining contingent risk insurance?
Silverman: The first questions we hear as brokers are “What’s this process going to look like? How long is this going to take? What are the steps?” Megan, what happens when a client walks through the door with a digital box of materials and says, “Can you tell me whether this risk is insurable?”
Easley: Step one, we sign an NDA. We always want to make sure that we’re protecting the client and taking the right steps to ensure that their materials are confidential. Then we have a team of four dedicated contingent risk brokers dig in. It can be hard for parties to know whether something’s insurable. We encourage people to come to us with anything that they think could be insurable. We try to get a quick sense of how strong the case is on the merits, whether it’s procedurally positioned well for insurance, and whether there are markets that are going to be receptive to it. Not all markets will do all types of cases.
We try to get back to the client very quickly with our views on the likelihood of obtaining coverage, and what type of rates and limits we think we can realistically achieve. No one wants the client to go through this whole process, and then come out at the other end saying, “Thanks for getting this, but I don’t actually want to pay that much for it.”
At that stage, if everyone’s on the same page, and we’ve determined that we think the risk is insurable, we comb through the record and build the submission for the insurance markets. Following that we have calls with markets and work through the process with underwriters like Nicole and Bryce.
Silverman: Bryce, say you’ve gotten a submission from Megan on a matter. What does the process look like from when you receive it through when we’ve bound the insurance policy?
Guingrich: Initially, we take a look at the substance of the case and the jurisdiction. Is it in a jurisdiction where we are comfortable and have some familiarity? Are there multiple actions? We look at how that risk is being assessed by their counsel. If they have an accompanying counsel memo we look at that, and then maybe dig into some of the pleadings, as well, to verify things.
It’s also important to look at loss quantum and whether that’s been analyzed. Sometimes the merits are there but no one’s done any real analysis on what the potential outcomes could be, and whether there’s a damages model that could be isolated as high risk / low risk. At VALE, almost all our underwriters are litigators or former attorneys in some capacity. More minds are better than one. Everybody will brainstorm about potential weaknesses and strengths. We arrive at a short list of things we want to verify, or further inquire about.
And then we often speak with the potential insured, and their counsel and the broker, to discuss things conceptually to get to what needs to be insured. Maybe start getting into pricing. Then we’ll either decline it or send out a nonbinding indication — a rough term letter — saying what we’d be willing to insure, how much we want the client to retain, and what the pricing would be. There might be some back and forth on that; there might not.
If everybody’s on the same page, then there’s an underwriting fee agreement, and we’ll have outside counsel do an independent analysis. That’s important for our carriers to have, for the underwriting file, and it’s important for us internally. As a parallel process, the policy form can easily be circulated and started to make sure everything’s fine with the general conditions. As we mentioned earlier, those policies are not very complicated and lengthy compared to others. So that process, creating the actual contract, is usually the easier part.
Silverman: One question that every insurer wants to know is, what happens in the unlikely event that something nobody saw coming goes wrong? What does the process look like for trying to claim a loss under one of these policies? Nicole?
Barna: This is a conversation I have a lot. Sometimes there’s a view that once you bind the policy, essentially, you’ve made your bet. We’ll just let you know how it goes. And in some sense, that is true for all the reasons we talked about in terms of this being a known matter versus being unknown. At the same time, a lot of these will take many years to develop and reach final resolution. We need to be kept apprised along the way.
One of the things we didn’t touch on is that these policies, in the US at least, are usually structured as one-year policies with the claim notice at inception. One year is kind of an artificial construct, because we are noticed of the claim the moment the policy binds. From that moment on, it’s really no different from any other noticed claim that would be handled by an insurance company and monitored extensively by their claims team.
As an insurance company, we need to post reserves. On every kind of insurance there will be fast-developing, unexpected claims, and you have to pay them quickly. We like to avoid that, though, at all costs. And so, to the extent we get real-time information about how the litigation is progressing and developing, that’s helpful in that if things start to go wrong we can look to post early reserves.
One common claims mantra — I’m formerly from the claims side of the insurance world — is the earlier the better. The earlier you can get that reserve up is incredibly important for us. I find it’s really useful to explain to counterparties why that kind of information-sharing along the way, post-binding, is so important to us, because there can be friction there. We can modify and tailor the reporting provisions to the actual information the insured gets, because that does vary depending on if you’re talking to a claimant or a law firm or a funder, and we can certainly be flexible in that way. But there is a minimum standard we need to achieve.
Ideally, even if something does go wrong, we are well prepared for it and we saw it coming in advance. Once it comes to notifying an actual loss to the policy, the insured will need to provide an attestation of a proof of loss and any relevant financial backup information for our claims and financial team to make a payment for loss. But again, because it is a known risk — and hopefully, we’ve been watching it for some time — there can be quite tight timing of payments. It shouldn’t mean you’re waiting for months and months for payment. But that is helped by preparing us along the way.
“Once you get an insurance policy in place, you can borrow against that policy in a much more favorable setting.”
Vice President, Contingent Risk
7. How much does continent risk insurance cost?
Silverman: I have a final question for everybody. One of the first questions we hear from clients is “How much is this going to cost me?” We’ve talked about a wide variety of products, and that these are bespoke products that depend on the circumstances of the case. Nonetheless, there are some overarching patterns and general rules on how pricing works. Megan, from a broker’s perspective, what are rules of thumb on pricing these products?
Easley: We’re very careful to tell folks upfront that it really depends on the exact nature of the risk that they’re presenting. If we were going to give the most general range, most of what we see falls into a 7% to 17% blended rate-on-line, at least as an upfront premium for the case. So that would be the premium that you pay at the time of binding the insurance. Rates are higher than in other areas, even within transactional liability, because this is an inherently different type of risk. So, 7% to 17% is at least a fair place to start. It can be lower for portfolios; it could be higher for deferred and contingent premiums, or other more innovative structures that we’re starting to see in the market.
Silverman: From the underwriters’ point of view, what are you thinking about in pricing a deal?
Guingrich: It’s a market, right? What is a party willing to get paid to take a risk, and what is another party willing to pay to get rid of a risk, and do those overlap? It’s a negotiation process, always.
You start from a floor. It’s that 7% to 17%, but there are exceptions to anything. I saw one several years ago priced at 4%, where they had to overturn 150 years of bankruptcy law. That was a blended rate. But I don’t even think they ended up buying it in the end, because they were so sure of the risk.
On the really high end, you have matters where the action just doesn’t show as clearly that they will win, or the facts are not known well enough. That’s when pricing starts to go above 17%, into the 20% range. But typically, those policies don’t end up getting done because they have to be priced so high to overcome the uncertainty that the other side just can’t get comfort.
Silverman: Nicole, one of the things that both Bryce and Megan touched on briefly is that in addition to a good old-fashioned upfront, one-time premium payment, there’s been an evolution in more subtle, complicated structures and pricing in this industry. Can you explain a little bit about what you’re seeing along those lines?
Barna: There are some more creative structures that address cases where the insurer views the rate reflective of the risk as one that the insured is just not willing to pay, or it becomes economically infeasible for the insured’s models to make that work.
A concept that comes from the London ATE market is where there’s a tiered premium structure with an upfront deposit premium, and then an additional “deferred and contingent” premium that is payable only in the event the litigation is successful and comes from the proceeds or the winnings of the litigation.
That has proven to be a very effective model in that litigation market. It requires you to manage limit sizes, and build a defensible portfolio, because you need some of those wins to offset some of the losses. But it really can translate well to the litigation contingent risk market in the US as well.
Silverman: OK, that’s a great note to close on. I think we’ve done a good job of covering the basics of this industry. It’s complicated and growing. There’s always more to learn. Thank you all.
Why Contingent Risk Is Important to Funders
Megan Easley moved directly from the litigation finance industry to the insurance business, so she has a view from both sides of the fence. Part of what attracted her to insurance was the similarity in thinking about risk, but more important was the creativity and flexibility on the insurance side when it comes to litigation funding.
“Insurance is a real value-add, and there are a lot of different ways to use it,” she says. “Funders can use it to protect deployed capital in a new investment, and even when thinking about potential terms. The litigation finance space is quite competitive. As more and more people get into the space, an insurance component that protects some of a funder’s initial investment can allow the funder to offer more favorable terms.”
That’s just scratching the surface, she says. Insurance wrappers can cover entire portfolios. Contingent policies can be used to attract different types of investors, with different risk profiles, and eliminate concentration risk.
“There are a lot of ways for funders who are already in the business of looking at disputes and assessing risk to think about these products,” Easley says, “both for the risk transfer benefits and for monetization. Litigation takes a long time. Litigation funders are very familiar with that. But sometimes not everyone wants to wait, including their investors. This can be a way to deal with some of those challenges.”
— Steven Andersen