Litigation Risk: Insurance and Assessment

June 16, 2022
Steven Schwartzapfel

What Is Litigation Risk?

Litigation risk is the possibility that negative legal action will likely be brought against a company due to the actions of an individual or the corporation. Litigation risk could be higher or lower due to:

The products or services a company provides.
The mistakes of the corporation or an individual within the company, like employees.
The actions taken by the company or its representatives.
An interpretation of a company’s slogan or marketing materials.
And more!

For example, litigation risk can come in the form of an individual or class action lawsuit. This can cost businesses a lot in terms of legal fees, liquidity, and stakeholder confidence in officers performing their fiduciary duties or carrying out good corporate governance.

Litigation risk can come from various sources, including customers, vendors, businesses, shareholders, etc. For example, if a company produces a product that malfunctions and injures the purchaser, the company could be a high litigation risk if the customer is angry. The customer may decide to sue the company, which could result in major material losses for the organization and reputational damage.

As evidenced, the negation risk is a major concern for larger organizations. Big companies are often more susceptible to litigation risk due to factors including but not limited to:

Larger companies have larger potential coffers or savings, so the potential of a successful plaintiff recovering massive damages is higher (or is perceived to be higher).

Larger companies have more employees. The more employees a business has, the more opportunities for at least one employee to make a misstep potentially worthy of a lawsuit.
Larger companies interact with more customers and vendors. The more customers and vendors a business interacts with, the more potential plaintiffs for future legal actions.

Given these elements, many large organizations use litigation risk insurance or perform litigation risk assessments. Both topics are vital if you are a small business owner looking to expand or are worried about potential legal actions in the near future.

What Is Litigation Risk Insurance?

In a nutshell, litigation risk insurance is a type of insurance designed to protect businesses from the possibility of high litigation costs. Most litigation risk insurance policies are bespoke, meaning they are custom-tailored and priced for specific business needs and projected expenses. Different policies may be designed to cover different possibilities or risks. For example, adverse judgment insurance only covers the cost of final judgments in litigation motions.

Regardless of the exact type, litigation risk insurance is meant to provide company executives with peace of mind. If they have the right insurance policy, they may be significantly protected from financial strain even if the litigation goes poorly for them.

For example, let’s say a company is sued by a consumer for product liability. The lawsuit is successful, and the court decides to award the plaintiff millions of dollars. However, the company has litigation risk insurance.

Due to this insurance, the insurance company pays the award from the lawsuit. The protected business does not. In exchange, the protected business pays regular fees to the insurance company to remain covered.

Litigation risk insurance is not required by law. However, many companies are looking into litigation risk insurance these days to offset the risks of doing business in an increasingly interconnected, digitized world. In general, litigation risk insurance may be especially worthwhile if you are at a higher risk of having:

Alegal action decided against you
A previously successful legal decision overturned due to an appeal

To speak with one of our litigation riskattorneys at no charge, call Schwartzapfel Lawyers at 1-516-342-2200. One simple phone call and we are confident that your legal footing will be surer and your understanding of things to come, as a result, much improved.

Material Considerations of Litigation Risk Insurance

In addition to the above elements, there are other material considerations to keep in mind when it comes to litigation risk insurance. This type of insurance has its own unique elements and attributes.

Coverage Excludes Losses From Misinterpretations or Omissions

For example, litigation insurance coverage usually excludes losses resulting from omissions or material misrepresentations during the policy underwriting process. Put differently, if your business loses something because of litigation risk. Still, that risk doesn’t include what is explicitly spelled out in the policy, you won’t likely be compensated for those losses.

Then, if your litigation risk insurance policy covers you against successful compensatory damages but you are ordered to pay punitive damages to a case plaintiff, your insurance policy may not cover you for those punitive damages. Therefore, you must have educated, experienced attorneys look over any litigation risk insurance policy before signing any dotted lines.

Coverage Is Only Triggered by Final Judgments

Moreover, most litigation risk insurance coverage is triggered only when the ultimate, non-appealable final judgment or disposition of litigation is rendered. In other words, your coverage will likely only come into effect when the “final” or last hearing takes place.

So, while litigation risk insurance policies are relatively flexible and customizable and provide lots of immediate benefits, you’ll only get the big payout if there’s a judgment and any other potential appeals are exhausted. For example, if your company is found guilty of product liability, you are unlikely to receive coverage from your insurance company until you have exhausted all available appeals options.

Note that this also means you may not have coverage under your litigation insurance policy if your case settles. According to the fine print of many insurance policies, insurance coverage is not applicable since there isn’t a final judgment on the case if you settle with the plaintiff.

This also means that insurance coverage applies only to the final judgment. It doesn’t protect against the possibility of judgment-proof defendants. In such cases, the plaintiff will likely only receive a small percentage of the full award since the judgment debtor can’t pay or be collected against for whatever reason.

Due Diligence Is Key

Given the above, it should be clear that due diligence with any litigation insurance policy is absolutely critical. To this end, your attorney should look over every line of a litigation insurance policy to ensure that:

It is appropriately detailed and comprehensive for all the potential litigation risks you’ve assessed and found to be likely for your organization.
It doesn’t contain any negative loopholes that could be used against your organization.
The insurance policy is appropriate for your goals and risk coverage plan.

Considering the importance of this, you should act now and contact the seasoned team of tort lawyers at Schwartzapfel Lawyers right away at 1-516-342-2200.

Types of Litigation Risk Insurance

There are many different types of litigation risk insurance. Overall, however, two types stand out as particularly common.

Adverse Judgment Insurance

As noted, adverse judgment insurance is a specific type of litigation risk insurance that protects defendants, or any other intended beneficiaries, in the event that they receive an adverse judgment.

For instance, if a business believes that it might lose an upcoming lawsuit, adverse judgment insurance may protect them from having to pay damages (either partially or completely). Adverse judgment insurance can be particularly worthwhile for businesses looking into mergers and acquisitions.

That’s because litigation risk is one of the largest issues with deal diligence. Many organizations, before merging or acquiring other companies, look into the possibility of adverse litigation or judgments. Litigation risk insurance of this type can help alleviate concerns and make companies more attractive for mergers or acquisitions.

Adverse judgment insurance may help potential organization buyers feel more comfortable with a purchase. Even if a potential business is at risk of litigation, if a business is protected by adverse judgment insurance, the purchasing company doesn’t have to worry about paying lots of cash in the event of an adverse judgment later down the road.

Even for outside mergers and acquisitions, adverse judgment insurance can be worthwhile. For example, adverse judgment insurance can protect businesses if well-financed plaintiffs sue them. This can, in turn, give the defending business more negotiation power so they can pursue more attractive settlement solutions.

For more on protecting yourself, your loved ones, and your financial future, call Schwartzapfel Lawyers now at 1-516-342-2200. Alternatively, visit us online to schedule your free consultation today!

Judgment Preservation Insurance

The second most common type of litigation risk insurance is judgment preservation insurance. This insurance underwrites the risk associated with litigation judgments being overturned or reduced during the appeals process. When protected by judgment preservation insurance, plaintiffs who succeed during trial actions can remain confident that their financial victory is insured.

Note that judgment preservation insurance typically provides coverage for companies up to a maximum amount slightly below the total award. For instance, if a company is successful with a lawsuit and is awarded damages totaling $12 million, it may have judgment preservation insurance that covers it for up to $10 million in the event of a total reversal.

Judgment preservation insurance can be worthwhile in a number of areas, including intellectual property litigation. For instance, imagine a scenario where an IP owner tries to gain full ownership of their IP plus damages against defendants.

The IP owner is successful, but they spent a lot of money and time to secure their litigation victory. The appeals process is still on the table, however, and they want to make sure they receive most of their award. Judgment preservation insurance provides peace of mind in this circumstance and others.

Judgment preservation insurance is especially useful for trials that have large damages. The larger the compensation award given to the plaintiff, the more incentive the defendant has to appeal the decision. Given that the appeals process can often span several years, business owners may prefer not to worry about their awards during this extended period.

Even in the best-case scenarios or the most apparent open-and-shut verdicts, uncertainty can loom in the minds of successful plaintiffs. Judgment preservation insurance mitigates that uncertainty.

Dial 1-516-342-2200 and speak directly with a skilled member of our award-winning team today. Alternatively, if you would prefer to firm up on litigation risk insurance first, please continue reading.

Is Litigation Risk Insurance Worthwhile?

Here, the answer depends on your business, the strength of its finances, and your specific needs. For many organizations, litigation risk insurance can be extremely worthwhile, especially as they get larger and as their consumers or client numbers get higher.

Generally, the more customers or clients one has, the more potential avenues for litigation appear. If your organization has one million customers, that is one million potential people who may decide to sue your organization for valid or invalid reasons.

Furthermore, litigation risk insurance can be extremely worthwhile for companies involved in mergers and acquisitions, as broken down above. Smaller companies hoping to be acquired by larger ones can use litigation risk insurance to offset the inherent risk of purchasing them. That way, even if they are involved in litigation at the time of acquisition, the purchasing or parent company will not have to worry about paying excess litigation fees and/or damages.

If you’re not sure whether litigation risk insurance is worthwhile, you might consider a litigation risk assessment. Knowledgeable legal professionals like the team of Schwartzapfel Lawyers can help you determine:

Whether litigation risk insurance is important
Whether the cost of litigation risk insurance is worthwhile relative to the cost of negation damages
Whether there is other sound legal counsel that will be helpful during or on the run-up to a legal case
And more!

For more information as well as a free case evaluation, contact us today online or at 1-516-342-2200. It will be our honor and privilege to assist you as best we can, no matter your situation.

How Does Litigation Risk Insurance Underwriting Work?

Litigation risk insurance underwriting focuses primarily on two (2) key elements: the likelihood of the insured organization’s success in any legal action and what likely awards a plaintiff could win in the event of a legal loss. Let’s take a closer look at both of these factors.

A litigation insurance underwriter will likely first examine the factors that affect an organization’s legal defenses. For example, suppose you have a skilled law firm on retainer to protect you against legal actions from consumers or vendors. In that case, you’ll be rated as having a higher ability to defend yourself against legal threats. In turn, this could reduce your insurance premiums and result in a better underwriting agreement.

Next, the insurance company will assess the potential payment based on typical lawsuits within your industry, niche, or target audience. After analyzing these factors, the underwriter will likely create a policy with a hypothetical coverage amount or maximum.

If you opt for judgment preservation insurance, the underwriter may also ask what the likely or realistic damage reduction is if the case’s initial judgment is not affirmed. “Likely or realistic” damage awards are somewhat subjective but can also be based on market research, insurance officer experience, and other factors.

For further clarification, consider how this might play out in real life:

You run a company being sued for $100 million, including legal costs and other financial losses.
Through research and experience, your loan underwriter discovers that if your company is found liable for the lawsuit, your damage award will likely only be a fraction of that amount, such as $20 million.
Thus, insurers expect to provide about $20 million in retention and $80 million in coverage. The board of directors approves the policy for risk management purposes.
On the other hand, if the underwriting indicates that the damage award could be over $30 million, the retention may shift to compensate, becoming $30 million. The policy would compensate you for a hypothetical $70 million in coverage.

As you can see, the exact amount of coverage you can expect for a litigation insurance policy can vary heavily. Speak with your attorneys when you receive paperwork from a prospective insurance company; they’ll be able to tell you whether the company is a good match for your financial needs and potential legal outcomes.

Litigation Risk Assessments Explained

Litigation risk assessments are important tools that your business may use to determine whether litigation risk insurance is worthwhile. A litigation risk assessment is a process designed to provide business management with concise and early evaluations of the costs and potential risks associated with a specific piece of litigation, such as a defense case or a plaintiff case.

Litigation risk assessments can be formatted or tailored for specific cases or clients. Generally, however, they will include the following components:

An introduction and recommendation to summarize the litigation and break down a recommendation or strategy for an optimal resolution.
A summary of facts, which breaks down the key facts of the case at hand.
The case status, which may also include anticipated discovery and motions and/or settlement discussions.
A legal analysis compiled by professional legal representatives. This should include the benefits and risks of obtaining judicial precedents.
Strengths and weaknesses of the client’s factual or legal position, such as whether the tribunal will be friendly or hostile, how competent the opposing counsel seems to be, etc.
The anticipated budget for legal proceedings, including arbitration or some other means of alternative dispute resolution.
The possible results and probabilities of those results. This can help organizations decide, for example, whether they should pursue aggressive settlements or push a case to trial.
A conclusion and recommendation. The official recommendation will help companies make wise decisions regarding insurance, what course of legal action they should take, and more.

In other words, litigation risk assessments are very important for deciding the right action to take as a business executive.

Litigation risk assessments can be compiled and presented by attorneys. Generally, they are compiled by the attorneys expected to carry out future legal proceedings for the business. That’s because those attorneys have the most information about the accounts and/or clients, and will provide the most useful recommendations accordingly.

Bottom line: Litigation risk assessments can inform companies as to the likelihood that they will have to pay damages or awards to plaintiffs. They can also advise companies on the probability of their receiving awards if they are considering future legal action against defendants.

How To Use Litigation Risk Assessments

Litigation risk assessments can be valuable, but only if they are used in the right context and at the right time. Generally, litigation risk assessments should be used very early. The earlier, the better. Try to perform a litigation risk assessment no later (30) days after receiving a notice of a legal claim or litigation has already been received in defense cases. You should also perform a litigation risk assessment before the plaintiff’s litigation starts.

This does mean that your information will likely be incomplete when you begin your litigation risk assessment. Still, it’s better to have an initial, broadly accurate assessment ready for insurance purposes instead of waiting later on, when you’ll be less likely to secure a good policy.

Furthermore, early litigation risk assessment usually provides a decently good picture of a case that won’t change massively by the end of discovery or aggressive litigation on the other side’s part. Once again, the sooner you perform your litigation risk assessment, the better.

You can then use your litigation risk assessment as your overall business plan for your legal proceedings. Your specimen should be reviewed regularly and even revised if necessary. As litigation progresses, and as the discovery phase in particular proceeds and concludes, you may discover more facts that can impact your legal strategy, your litigation risk, and overall insurance premiums.

As such, you should view your litigation risk assessment as a living document rather than an ironclad or set-in-stone assessment.

The Value of Litigation Risk Assessments

Litigation risk assessments are incredibly valuable for many companies, especially larger organizations with hundreds of employees and big customer bases. Some of the benefits you can see from using litigation risk assessments include:

A reduction in the number of pending cases.

Reductions in the expense of litigation, including payouts and attorneys’ fees.

Reduced expenses for discovery. Since litigation risk assessment requires you to fully understand relevant facts for a potential legal case, many of those facts can be ported to the discovery process. This can cut down on the tiny need for successful discovery. Litigants can prioritize or eliminate many discovery elements like depositions as a result.
Improved ability to settle disputes between your organization and another company. Through litigation risk assessments, you can determine just how much of a risk you have of another company succeeding at recovering damages from you in court. With this information, you can push more aggressively for another settlement or out-of-court resolution.

All these benefits will likely reduce the time you have to worry about legal action and significant monetary damage. Litigation risk assessments require some upfront investment in time and money, but they are usually well worth it in the long run.

Contact Schwartzapfel Lawyers Today

Litigation risk insurance is a new type of insurance product that major businesses should heavily consider, especially if they have encountered negative litigation results in the past. Both adverse judgment and judgment preservation insurance policies can be financially beneficial and lead to peace of mind for yourself and other executives.

However, you’ll likely want to carry out a litigation risk assessment before signing up for a new policy. Schwartzapfel Lawyers can help with this by examining the specifics of any upcoming legal action you may be facing, and then making professional recommendations based on our findings.

Additionally, we can tell you whether litigation risk insurance is worthwhile given the odds of an adverse judgment or a successful appeal claim against you. For more information as well as a free consultation, please contact Schwartzapfel Lawyers today at 1-516-342-2200.

But you shouldn’t wait, as your window to act and recover the money and benefits you are entitled to may soon close forever. To keep that from happening, you must protect your financial future starting today. To this end, please allow Schwartzapfel Lawyers the honor and privilege of fighting for you™ every step of the way.

Call now!

DISCLAIMER: Nothing on this page should be considered legal advice. You should seek the appropriate counsel your situation requires. For more information, call 1-516-342-2200 now!

Sources:

Schwartzapfel Lawyers, P.C. | Fighting For You™™

Emerging Trends In Litigation Risk Insurance | Insurance Journal

Litigation Risk Definition | Investopedia

Assessing your litigation risk | Courtroom Sciences

Emerging Trends In Litigation Risk Insurance | Insurancejournal.com

Insurance Underwriter: Definition, What Underwriters Do | Investopedia

Litigation risk Definition | Law Insider