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Judgment Preservation Insurance – Preserving damages awards against an adverse appeal/annulment

So much of the claimant litigation risk transfer market, both litigation finance and insurance, is focused on the risk of avoiding an adverse outcome with the resultant loss of expended legal fees.  However, obtaining a first instance decision, whether through the courts or arbitration, might only be half the battle and therefore half-real risk.

The elation which naturally follows a favourable award worth a substantial value can often be short-lived, as defendants seek to overturn the decision, whether wholly or in part, via an appeal or annulment process.  An appeal can potentially add years of additional uncertainty and for the claimant, any existing litigation fatigue can be compounded further.

In psychological terms, a sense of so-called loss aversion can kick in for the claimant– which is the economic fear of losing a financial value versus acquiring an equivalent gain. Fortunately, a niche insurance sector is accessible via TheJudge, which can help mitigate the risk of losing the hard-fought award and so doing ring-fence some financial certainty.

When lawyers think about litigation insurance, they often think of adverse costs (or fee-shifting) insurance (e.g. After the Event insurance) or more recently, contingency fee insurance – both of which are designed to cover legal fees rather than the damages. However, there are different sectors within this growing market and “judgment preservation” insurance or “appeal risks” insurance is one such subset.

How does litigation appeal risks insurance work?

A judgment preservation insurer is one that agrees to indemnify the award holder for a certain portion of their damages award against the risk of the award being reversed, whether partially or wholly, via an appeal or annulment.  It, therefore, follows that the underwriting of the cover typically takes place once the first instance award is known.

Example:

Claimant company X achieves an $80m award but is facing an appeal, which could ultimately reverse the decision.  In this instance, the appeal risk insurer might agree to cover say $40m of the award value against such an outcome.  The award holder can now provide certainty to the shareholders that at least $40m of their award value is secured.

Should the award be overturned in full, the insurer indemnifies the insured for the $40m policy limit.  Alternatively, were there to be a partial reversal, resulting in a reduction in the award down to say $30m, then the insurer will indemnify the shortfall between the $30m finally award and the $40m coverage limit, which in this scenario means the insurer pays the $10m shortfall.

How is the premium paid?

The insurer will typically charge the insured party a premium set against the maximum limit of indemnity. The pricing is tailored to each specific case and the perceived risk associated with the appeal.

Who are the insurers providing appeal risks insurance?

TheJudge only works with recognised international insurance companies who have at least an “A-” /“excellent” financial security rating or better, as determined by international security rating agencies such as Standard & Poors and AM Best.

My client has a large award which they are seeking to preserve, what level of cover is available?

There is no fixed upper limit. The panel of insurers and reinsurers TheJudge works with can achieve limits up to USD $1bn.  Each insurer will typically have a maximum level of cover they are comfortable writing for any single risk.  As is common in the insurance industry, where large limits of cover are required, insurers can co-insure the risk between them to achieve the desired target.  At TheJudge we readily access a large panel of insurers, which means we can secure covers from USD 10m through to policy covers requiring up to $1bn.

Is appeal risks insurance available for Defendants as well as Claimants?

Yes, potentially.  While in many respects it can be more straightforward to underwrite the risk of an appeal against a claimant award, it is possible to arrange cover for a defendant who has succeeded at first instance but faces an appeal by the claimant.

What types of cases are suitable for appeal risks insurance?

Appetite between insurers can vary.  Some insurers have specific skill sets and therefore an appetite for niche areas and case types, whereas others prefer a broad outlook. An insurer will typically need to be confident that the initial award was achieved via a credible and respected legal system with which the insurer is familiar.  They will need to be confident there is a good chance that the prospective insured will prevail in the appeal and that the final award will be a sum greater than the proposed coverage limit.

The types of cases we have seen at TheJudge have included construction claims, energy disputes; securities cases; patent cases; large value contractual claims and class action cases to name a few.  Insurers will readily consider both litigation and arbitration cases, including investment treaty arbitrations where a respondent state is seeking to annul an award.