Lengthy appeal process
Lawyers continually seek ways to expedite favourable outcomes in legal disputes, as extended litigation periods can pose significant challenges for companies. Beyond the ongoing legal expenses incurred, the situation becomes more complex when a company wins a substantial trial award. This award cannot be immediately recognised in their financial statements, cannot be incorporated into planned income, and remains inaccessible while the opposing party appeals the decision, which is often inevitable in cases involving sizeable awards. In essence, the judgment remains uncertain and illiquid for an extended period, leaving the company in a state of limbo, alongside their legal representatives.
Safeguarding with Insurance
These circumstances can discourage companies from pursuing litigation or compel them to settle for far less than the original award to mitigate appeal-related risks. Fortunately, in recent years, a solution has emerged in the form of judgment preservation insurance. To illustrate, imagine Company A, which has successfully won a $100 million award in a contract dispute against a competitor. However, due to the competitor's appeal, the award remains frozen for an extended period. Company A wishes to secure their award, eliminate the inherent risks of an appeal, and gain immediate access to the $100 million.
Company A decides to engage their insurance broker to arrange a judgment preservation insurance policy with the objective of safeguarding their capital. They pay Insurer B a premium of $10 million to ensure the preservation of their $100 million judgment.
For Company A, the potential outcomes are as follows: If the appellate court upholds their award, they will retain the full $100 million, but the net recovery will be $90 million after accounting for the insurance premium. However, if the award is reduced to $20 million, Company A will receive $20 million from the defendant and $80 million from Insurer B. After factoring in the insurance premium, their net recovery will still amount to $90 million. In other words, regardless of the appeal's outcome, Company A is guaranteed a net recovery of $90 million.
Risk Reduction
In most cases like this, it makes sense for the company to accept a modest reduction in their initial award to secure certainty about the final amount they will receive. This enables them to incorporate the funds into their profit and loss statement and use them for various purposes, such as legal battles or expansion efforts. The results almost invariably favour the company, as judgment preservation insurance transforms an uncertain and illiquid judgment into a certain and liquid asset.
Additionally, there are scenarios where law firms, acting on risk, purchase such insurance. For instance, a law firm that obtains a significant attorney fee award but faces the risk of a lengthy appeal might opt for this insurance to expedite the distribution of the award to its partnership. The same applies to defendants, who may purchase judgment preservation insurance to safeguard against potential judgment reversals that could impede their construction projects and financing.
Win-Win
From the perspective of insurers, judgment preservation policies are appealing because the case details are established, the trial records are finite, and legal issues have undergone extensive scrutiny in the trial court. Furthermore, these policies alleviate the unnecessary and risky burden of enduring an appeal with an uncertain outcome, which insurers can better manage by spreading risk across various cases. It also allows companies to move forward by "locking in" a portion of their awards, thanks to cooperation with hedge funds and capital providers that are willing to finance entities with judgment preservation policies.
It's important to note that judgment preservation insurance is a highly specialised type of policy, with only a limited number issued each year.
These bespoke policies are often of significant value and can assist companies in realising substantial sums. In recent cases, judgment preservation policies have been secured for judgments exceeding $1 billion, allowing insureds to monetise hundreds of millions of dollars. The growing use of this product is primarily driven by the increasing size of judgments, especially in intellectual property cases, and greater familiarity with the concept.
Expertise Needed
However, many in-house counsel and litigators in major law firms remain unfamiliar with judgment preservation insurance. Therefore, it is imperative for companies, law firms, private equity entities, and investors to explore and understand tools like judgment preservation insurance and other contingent legal risk insurance offerings.
Collaborate with brokers who can tailor solutions to mitigate known but uncertain legal risks. The potential advantages are vast, and these insurance tools are poised to play a vital role in the legal landscape.
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