ARIA’s last Korea M&A Insurance Review & Outlook had a small section on Contingent Risk Insurance, but since it led to several follow-up inquiries on the topic, we thought the more detailed discussion below would be of interest to you.
What is Contingent Risk Insurance (CRI)?
Ongoing litigation and regulatory issues create uncertainty and can create significant financial implications for litigants, lawyers, and M&A transaction buyers and sellers. Lawsuits can drag on for years, strong cases can unravel, damages can be difficult to estimate, and judges, juries, arbitrators, and regulators settle cases in unexpected ways. Contingent Risk Insurance (CRI) is a tailored risk management solution that transfers known legal and regulatory risks to insurers.
In other words, CRI ensures the outcome of a lawsuit or a portfolio of lawsuits before the matter or matters finally conclude. For stakeholders on the plaintiff’s side, CRI sets a floor on their recovery from a lawsuit, while those on the defendant’s side use CRI to set a ceiling on their exposure from a lawsuit. Insuring the outcome of a litigated matter before final adjudication delivers certainty and predictability to litigation.
Coverage is available for a wide variety of litigation types, including: IP / patent infringement, antitrust, general commercial disputes, commercial arbitrations, and government regulatory actions. In a merger or acquisition transaction, for example, CRI can even be structured to cover the risk of paying a large reverse breakup fee due to antitrust or other regulatory risks.
Types of CRI
- Judgment Preservation Insurance – Insures the value of a judgment when it can be challenged on appeal. Coverage continues until a final, non-appealable judgment is entered in the litigation.
- Adverse Judgment Insurance – Caps a defendant’s liability for paying damages. Coverage lasts until a final non-appealable judgment is entered. This insurance typically does not cover settlements.
- Specific Legal Risks – Covers loss stemming from a specific legal risk not in litigation, such as parties’ differing interpretations of contract terms.
- Work In Progress / Contingency Fee Insurance – Insures the value of counsel’s expected WIP/contingency fee. Coverage remains until a final non-appealable judgment is entered.
Key Factors for Underwriting CPI
- The policyholder has a strong position with solid legal and factual merits, and the outcome is binary.
- A clear understanding of the key underlying decisions in the case, confidence that they are supportable, and the proceedings are mature enough.
- Who are the parties involved (e.g. plaintiff, defendant, lawyers, judges) and does the defendant or plaintiff have a more sympathetic position?
- What jurisdiction is applicable?
- The policyholder has a compelling transactional or financial motivation to secure protection.
- Is the policyholder willing to have meaningful “skin-in-the-game”?
- Will the insurance reduce the probability of a settlement?
- What is the timing for the insurance as underwriting can take between 6 to 14 weeks to complete?
- CRI enables a plaintiff or a defendant to eliminate or reduce the risk of a negative result on appeal or at a retrial.
- Adds predictability to an unpredictable litigation, arbitration, or regulatory outcome.
- CRI locks in the value of a favorable judgment issued by a court or arbitration panel where the judgment could be reversed or reduced on appeal or remand.
- CRI turns a plaintiff side judgment into an A-rated asset the plaintiff can borrow against or sell for a lower cost of capital than historically available from litigation funders.
- Coverage can be structured to address a standalone single matter or a “portfolio” of several distinct issues that are in litigation.
- For mergers & acquisitions, CRI can ringfence existing litigation issues at a target company to improve valuation certainty and to remove an impediment to deal closure.
- For private equity and venture capital firms, CRI can address known liability and regulatory matters at a portfolio company to preserve value and make it a more attractive acquisition target.
The M&A transaction insurance market is changing rapidly with underwriters eager to consider new applications for contingent litigation risk insurance. Give ARIA a call to discuss case studies and any unique issues you may have; we would be thrilled to create a solution with you.