Successful litigants holding trial-court judgments have traditionally found themselves positioned similarly to mountaineers atop Mount Everest: After a long, brutal and costly ascent to the summit, they are only halfway home, as their opponents vow to appeal and take their victory away.
Executive SummaryAlthough casualty insurers often voice opposition to legal finance professionals, linking their roles in funding litigation to rising plaintiffs’ verdicts and settlement costs, the insurance industry is also in the business of putting its capital at risk to help plaintiffs through a relatively new coverage: judgment preservation insurance.
Here, Andrew Lundberg of Burford Capital explains how firms like Burford add value to the emerging specialty insurance class with premium advances and expertise.
This article was originally published on the Burford Capital website in early January 2024: “Legal Finance & Judgment Preservation Insurance | Burford Quarterly (burfordcapital.com). It is republished here with permission.
Legal financiers and other financial professionals have for years offered some peace of mind to such litigants in the form of claim monetization—advancing a portion of the judgment on a non-recourse basis in exchange for an entitlement from the judgment if and when it is affirmed and ultimately collected.
Recently, insurers have offered another financial product—Judgment Preservation Insurance, or JPI—that doesn’t advance funds against the eventual collection of the judgment but does mitigate the risk of reversal on appeal.
Legal financiers can help litigants access the JPI market and enjoy the mitigation of appellate risk that these policies offer by working with them both to fund the purchase of JPI policies and to optimize legal finance products to maximize returns and minimize risks on their insured judgments. In addition to its customary roles of advancing cash to the successful plaintiff pending a final decision and financing legal expenses on appeal, legal finance can enhance the benefit of JPI coverage by tapping legal financiers’ capital, experience and expertise.
What is JPI?
Judgment preservation coverage is simple in concept and, ideally, in execution. For a premium, the insurer agrees to assume the risk that a final trial-court judgment does not survive the defendant’s appeal, agreeing to pay, up to the stated policy limit, the difference between the trial-court award and the amount the plaintiff ultimately recovers post-judgment.
Unlike the claim monetization offered by legal financiers who advance funds against judgments on a non-recourse basis, JPI provides only judgment protection, not collection protection. JPI does not guarantee the judgment holder that some or all of the judgment will be recovered in all events. It covers only the legal risk of an adverse judicial outcome, not the risk of being unable to collect following a successful one.
Thus, JPI insurers do not cover either the duration risk of the post-judgment proceedings (they do not pay interest on any portion of the trial-court judgment accruing after it is entered) or the credit risk of the defendant (i.e., the risk that the judgment, even if affirmed in whole or in part, cannot be enforced against the defendant). And, of course, JPI does not advance funds to the judgment holder to use pending decision of the appeal; rather, the judgment holder pays the JPI insurer an upfront premium.
The underwriting diligence performed by JPI insurers on post-judgment cases mirrors that done by legal financiers, who evaluate claims all along the timeline, with the obvious difference that a post-judgment risk will generally present far fewer variables that a pre-filing or pre-trial one.
JPI insurers have the benefit of looking at the risk on a record that has, by definition, been developed to the point where a court has deemed it sufficient to finally adjudicate the claim (whether by trial or on motion), and thus in the context of a judgment that, by definition, reflects at least the trial court’s validation of the plaintiff’s position. With that record in hand, JPI insurers typically will engage outside counsel with special expertise in the subject matter to opine on the likelihood that the judgment will be upheld on appeal. That opinion, together with the plaintiff’s declaration that it has provided all other information the insurer may deem material to the risk, provides the basis for the insurer’s decision whether, and at what price, to provide coverage.
Given their very specific and limited scope, JPI policies are considerably shorter and simpler than most commercial insurance forms. Unlike all-risk property policies, comprehensive general liability policies and other familiar forms of commercial insurance written to cover a broad landscape of unknown future events, JPI forms cover a single, well-defined risk: reduction or reversal of a particular existing judgment.
Such policies have no need for the laundry lists of exclusions and conditions addressing a universe of imagined and yet-to-be imagined scenarios. Accordingly, in theory they should present a minimal degree of legal risk themselves.
Funding Steep Premiums
That’s the good news. The bad news? Primarily, cost.
JPI is expensive. Premiums run between 10 and 20 percent of the amount insured, whether that be the whole judgment or just a portion of it. Accordingly, a plaintiff looking to insure $100 million of potential judgment proceeds will need to find a low-eight-figures quantity of cash to put JPI coverage in place. (See, for example, Wall Street Journal, Oct. 17, 2023, “The Niche Insurance Policy Behind a Software Company’s Big Legal Payout” by Kristin Broughton, describing a software company with $2 billion judgment insuring a $500 million portion of the judgment for $57.3 million.)
Legal financiers are an attractive source of that cash, as well as of additional financing secured by the judgment. Many plaintiffs, of course, can’t or won’t pay such a premium out of their own funds. Some are suffering the effects of the wrongful conduct of the defendant that produced the judgment they now hold. Others would rather spend the cash they do have on building their business rather than hedging their bets on their not-quite-final judgment. And many may be loath to borrow from banks or other conventional lenders even if traditional debt is an option for them.
Meanwhile, unsurprisingly, JPI insurers have little interest in financing the premiums for their would-be policyholders: Having already taken on the litigation risk of the defendant’s appeal, they aren’t disposed to tack on the credit risk of the plaintiff being unable to pay the premium if the judgment is ultimately reversed.
How Legal Finance Enhances JPI
Legal finance offers a solution by providing an alternative that is not only risk-free but also credit-enhancing.
Legal finance applied to the premium for a JPI policy—like legal finance applied to the cost of prosecuting the claim to judgment in the first place, or to the monetization of a claim prior to the affirmance and collection of the judgment—is generally non-recourse. The funder recovers its deployment and its profit only from the proceeds of the case (if the judgment is affirmed) or the JPI policy (if it isn’t). If the financier recoups its investment and expected profit, it’s only because the plaintiff has obtained a recovery and will enjoy the balance of the proceeds. Meanwhile, the plaintiff’s other assets remain unencumbered.
In the JPI environment, moreover, although the legal financing follows the same structure, the economics of financing the further legal proceedings or of monetizing a portion of the hoped-for recovery are generally more plaintiff-friendly given the additional collateral provided by the JPI. The financier’s return, normally paid only out of the ultimate proceeds generated by a successful claim, may now come either from the payment of the judgment by the defendant (if the judgment survives and is enforced) or payment under the policy by the insurer (if the judgment is reduced or lost).
Outside of the JPI environment, legal finance providers are accustomed to underwriting appellate risk, whether as an element of the overall risk profile of a claim presented to them pre-judgment (or even pre-filing), or as the core legal risk of a case looking for expense funding or monetization after a trial court award. But where an insurer is willing to cover some or all of that risk, the financier is well-positioned to finance the premium for that coverage, as well as potentially to advance a portion of the expected proceeds, and can make its capital available at a lower rate, reflecting the security provided by the JPI (of which it will be a beneficiary alongside the plaintiff holding the judgment).
Thus, in theory—that is, assuming the JPI insurer’s timely payment of the policy proceeds without dispute—the financier’s legal risk in a JPI-insured transaction should, to the extent of the covered portion of the judgment, be zero. Of course, it continues to bear legal risk on the uninsured portion, as well as the duration risk of the case (how long it takes to resolve all appeals and their sequelae), the collection risk of the defendant (will it pay, and be able to pay, when the day arrives), and the collection risk of the JPI insurer. But the insurance, properly done, should produce a material reduction in the cost of capital it provides compared to capital deployed in the absence of such insurance.
Additional Security Through Legal Finance
Besides the capital flowing to the plaintiff and its insurer, legal financiers provide an important additional benefit: reduced risk of collecting under the JPI policy. JPI is still a relatively new class of insurance, and new insurance products are notorious for giving rise to payment disputes. An unfamiliar subject matter can put underwriters in a learn-as-you-go posture that leads to misunderstandings about the intended terms or conditions of coverage. When previously untested language proves ambiguous, insurers may resist payment to which the insured believes it is entitled.
Consider, for example, potential disputes over what constitutes material information that a policyholder has a duty to disclose during the underwriting process, and whether a failure to disclose constitutes a breach that voids coverage. These novel policies require careful review and sometimes material revision by experienced insurance professionals, including qualified brokers and savvy legal counsel.
An eight- or nine-figure insurance policy should not be a placebo or a mere ticket to a fight. Sophisticated legal financiers have the expertise needed to reduce those risks to the minimum—and they bring that expertise to bear in both their own and the judgment holder’s interest. An experienced legal finance provider can work with the insurance broker to review and revise policy language to avoid coverage disputes.
JPI is a significant new feature of the legal environment, giving litigants the ability to leverage their courtroom successes—whether gained at their own expense or with the aid of third-party capital—to achieve certainty, liquidity and security that can enable their businesses to grow. Legal financiers are uniquely positioned to make those benefits available, affordable and reliable, adding new value to the litigation landscape.