Contingent Liability Insurance Bids Require Clear-Eyed Appraisal

Contingent liability insurers are looking to cover good risks of all shapes and sizes. That includes plaintiffs seeking to protect their interest in a case, litigation funders looking to protect their principal on investments, acquirors wanting to cap downside litigation exposure in an M&A transaction, and law firms applying to cover some amount of their time and costs when taking contingency matters.

With all of the possibilities, you may not be clear whether your situation is ripe for coverage. The following considerations can serve as a guide.

How Clear Are the Legal Issues?

This question should be the North Star guiding any insurance submission.

All lawsuits contain a mix of legal and factual inquiries. Contingent liability insurance policies are best suited to protect against certain risks involving legal questions.

This isn’t to say you need a judgment in hand to apply for a contingent liability insurance policy.

Insurers will consider matters that haven’t been filed. But they’re generally more comfortable doing so when the matters at issue—regardless of procedural posture—will turn on questions of law (i.e., where factual disputes are less likely to pop up and determine the outcome).

While legal issues can be challenging to underwrite, there are often years of case precedent, statutory interpretation, or administrative rulings that can get insurers comfortable with a legal risk.

Underwriters often review and assess analytics examining how legal issues have been adjudicated. Looking at historical precedent and new data analytics can be very helpful in assessing the viability of a contingent liability insurance placement.

What’s the Matter’s Financial Structure?

Insurers will assess how a policy can go “off risk”—that is, how the covered matter would resolve favorably such that the policyholder wouldn’t need to submit a claim for loss—and an application will be measurably strengthened by a robust, credible damages model.

Unsurprisingly, not all damages categories are considered equal—for example, those outlined by statute versus those based on estimated punitive damages. Failing to differentiate or otherwise overselling case value can lead to a loss of credibility.

In addition, applicants should also be prepared to establish their financial interest at stake.

For litigation funders, this means explaining their payment structure and priority. For law firms, it involves a review of both their contingency fee agreement and their projected budget.

The overarching goal is to show insurers exactly how the policy limits sought fit neatly into the applicant’s expected value of the matter, and therefore why the risk should be acceptable to underwrite.

A damages analysis can be tough to assess, particularly in an early-stage placement. However, the more data the applicant provides to insurers on this point, the better.

Potential insureds should be prepared to justify their damages assessment. Often, they can do so by providing access to their counsel and executives, sharing with insurers any third-party damages analyses prepared in connection with the matter, and making the third-party damage experts available as well.

Why Is Insurance Needed?

Motivation is the first thing that outside underwriting counsel look at in assessing contingent liability insurance placements. It drives the entire process.

Over the last few years, certain motivations have surfaced. We’ve not only seen litigation funders motivated to protect their capital investment, but also judgment holders and law firms exploring insurance options to help them monetize judgments and “work in progress” on contingency fee arrangements, respectively.

Whatever the stated motivation, assessing where insurance factors in is critical to insurers’ review and underwriting processes.

Insurers are vigilant about the threat of adverse selection risk. They’re wary of applicants who are only submitting the most speculative, “lottery ticket” matters they wouldn’t pursue without coverage.

Focusing on cases with strong legal arguments and well-considered damages projections will go a long way toward assuaging adverse risk concerns. Still, applicants must have a thoughtful response to this fundamental question: “Why are you seeking insurance?”

Consider a hypothetical scenario: A litigation funder who has never before used contingent liability insurance is now investing in several new major commercial cases but seeking insurance to cover just one. There could be several legitimate business reasons behind this approach. A clear explanation will address any reflexive insurer skepticism.

We’re seeing a trend toward applicants who view insurance as a strategic tool, not strictly as a “risk transfer” mechanism. Increasingly, applicants come to the table after thinking through their financial and business rationales for using contingent liability insurance, resulting in a smoother submission process and allowing the parties to think creatively about how best to achieve the applicant’s goals.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Connor Williams is a contingent risk liability practice leader and managing principal at Vanbridge, a division of EPIC Insurance Brokers.

Steve Penaro is partner in Alston & Bird’s litigation and trial practice group, advising insurers on underwriting matters.

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