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As recently reported by Bloomberg Law, the Judgment Preservation Insurance (“JPI”) market is facing a large loss arising from a $1.6m billion judgment being reversed, leaving insurers on the hook for a reported $500m – $750m loss, with Liberty Mutual (“Liberty”) allegedly providing cover of between $100m and $150m under the policy.

The report goes on to reference Liberty having backed out of “at least two” potential litigation insurance deals following notification of this loss which begs the question; what are the implications for the JPI market of suffering such a large loss?

For those not familiar with the JPI industry, it involves insurers providing policies to plaintiffs with successful judgments or awards from lower courts – often courts of first instance – covering them against the risk of that judgment or award being reversed or reduced at a subsequent appeal.

In this particular instance, a group of insurers underwrote a policy insuring the risk that a 2022 judgment against tech giant IBM, for $1.6bn, would be reversed or reduced on appeal. Last week, a Court of Appeal in New Orleans overturned the decision, resulting in the worst outcome for insurers and a potentially significant material loss.

Being a relatively nascent insurance product, there will be both short and medium-term implications for the market. The difficulties the participating insurers will face is not only the sheer size of the limits involved but also the fact they will unlikely have a mature book of similar-sized JPI indemnities, which will inevitably make the impact more severe in their portfolios.

There will unquestionably be a market adjustment/correction.

In the immediate/short term, the obvious points are that pricing will harden and that insurers will be more cautious when it comes to risk selection. On the increased pricing front, this is likely to result in higher upfront premiums (payable on inception of the policy and non-refundable) and could accelerate the introduction of additional contingent-based premiums.  Contingent premium structures can be a useful tool to allow the parties to negotiate a workable model whereby the insured can limit how much they pay at the inception of the policy, whilst ensuring the insurer can earn an additional premium, which is only payable if the insured prevails and recovers damages in their case.

The other short-term impact will likely be a reduction by certain insurers in the maximum limits they are prepared to offer, to mitigate the volatility risks.  Securing a $500m – $750m indemnity is doubtless going to be harder tomorrow than it was in 2022 since the impact will be recognised not only by those insurance carriers who participated in the IBM risk but also those who participate in the market more generally.

Arguably, such a market correction could prove a blessing in disguise, since insurers can build their portfolios with smaller exposures and improved premiums models and thereby create a more sustainable market, which benefits all prospective users of these products going forward.

Assuming the market adjusts, as we expect, then it wouldn’t be without precedent.

While there are several brokers active in the JPI market, for many the nature of insuring single-risk litigation disputes in whatever policy form is still relatively new business.  At TheJudge we’ve specialised exclusively in hedging litigation risk with insurance products for over 25 years of experience.  During this 25-year heritage, we’ve seen at least three significant market cycles, resulting in numerous insurer and managing agency casualties. Admittedly, these weren’t JPI specific, but involved the underwriting of single-risk litigation events and often with limited portfolio balance.  This legacy exists due to the UK origins. The UK and Europe have been the originators and exporters of many of the litigation risk transfer products available today. Indeed, a significant portion of the capacity for US risks still originates from European-based insurers and reinsurers.

In truth, the early signs of a market correction had already started before the IBM award. Feedback from many carriers in the market over the last 12 months has indicated that the market was already shifting away from the very large limit placements in favour of smaller limits and more favourable premium structuring.   Indeed, in recent months, we’ve brokered judgment preservation covers with our panel of insurers at a range of different indemnity levels.  At the lowest end, we’ve arranged JPI cover for an award as low as c. $10m, with more typical policy limits applying to verdicts in the $50-150m range.  We expect this sector of the market to continue to scale and hopefully provide a portfolio spread necessary for underwriters to build a sustainable and balanced book of business.

With prices and appetite inevitably hardening, at least in the near-term post-IBM, the role of an experienced broker becomes increasingly key to securing the necessary capacity support, and on the best terms available, both in terms of the cost and coverage structure.  The next year could be a year of adjustment, with some turbulence as new premium and pricing structures are tested. While there could well be some carrier exits, we’d equally expect to see new capacity entering the market.

For those who anticipate having a potential need for JPI in the near term, we’d strongly recommend commencing an earlier initial discussion than perhaps would have otherwise been the case pre-IBM. This could even mean starting discussions in anticipation of a judgment rather than post-judgment.  This will give us some additional time to start planning the best strategy, particularly if the market hardens more than anticipated.

 

Do you have a case that might potentially benefit from judgment preservation insurance? 

 

Key contacts:

 

                                 

UK: Robert Warner                                                   US: James Blick

robert.warner@thejudgeglobal.com                   james.blick@thejudgeglobal.com