Over the past four decades, Robert “Bob” Hartwig has championed the critical role the insurance industry plays in the nation’s economy. So, when the former Chief Economist and President of the Insurance Information Institute, who also serves on the Federal Reserve Board’s Insurance Policy Advisory Committee, perceives something not in the industry’s best interests, he cannot hold back.

This “something” is judgment preservation insurance (JPI), a bespoke insurance policy covering the possibility a successful judgment at the trial court level will be overturned on appeal. In July, Carrier Management published a feature article citing a series of giant losses sustained by JPI insurers. The article noted that third-party litigation financing firms, long demonized by the insurance industry for contributing to nuclear verdicts in the eight-figure and nine-figure range, are financing the insurance premiums for many JPI policies and even monetizing a portion of the settlement or judgment.

Related articles: Judgment Day; How Legal Finance Adds Value to Judgment Preservation Insurance

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As Andy Lundberg, Managing Director at Burford Capital, a publicly traded provider of such legal financing products, stated in the article, “JPI and legal finance are complementary products; both deal in legal risk, but the water flows in different directions.”

Hartwig, a PhD economist at the University of South Carolina, where he is a Clinical Associate Professor of Finance and Director of the school’s Risk and Uncertainty Management Center, read the article after Carrier Management provided it on LinkedIn. Minutes later, he posted the following comment:

“Readers may be perplexed as to why insurers, who on the one hand support reforms to the legal system that would rein in the increased prevalence of nuclear verdicts, would on the other hand offer a product that guarantees a large share of such awards will still be paid to the plaintiffs and their attorneys if the ruling is overturned. Indeed, a primary target of the insurance industry’s tort reform efforts is third-party litigation funding (TPLF). But, as this article discloses, the same TPLF firms backing litigation that drives nuclear verdicts also finance the premium to pay for insurance that will guarantee large payouts to plaintiffs and their attorneys.”

Hartwig is not alone in finding it ludicrous that carriers would sell a litigation insurance policy backed by the legal finance firms it routinely attacks. Lundberg also weighed in. “It’s important to understand what the [insurance] industry’s real complaint is here—not that litigation financing is a bad thing; it is a bad thing only in cases where the judgment on appeal is insured. They’re hypocrites,” he said in an August interview. “They complain about legal finance, but they’re happy to invest in a product to profit from litigation that doesn’t hit their liability book.”

“They’re hypocrites. They complain about legal finance, but they’re happy to invest in a product to profit from litigation that doesn’t hit their liability book.”

Andy Lundberg, Burford Capital

In a Nutshell

The extent of the relationship between JPI carriers and TPLF firms is unknown, since there are no regulations requiring the disclosure of a JPI policy when a case is on appeal. Suffice it to say the number of policies sold is significant. The July article tallied 30 to 40 insurance companies as sharing in the risk of eight-figure and nine-figure JPI losses via a tower, albeit several are under the cover of an MGA (managing general agency) or an MGU (managing general underwriter). An insurance broker who specializes in litigation insurance products commented that the capacity of the JPI market is substantial due to the associated risks.

These risks have been illuminated by three large JPI losses that have been made public, one of which involved a group of insurers led by Liberty Mutual. The Boston-based carrier reportedly sold a JPI policy to BMC Software Inc., covering the possibility of an appeals court reversal following BMC’s successful litigation against IBM (the judgment was overturned by a federal appeals court in April 2024). BMC’s JPI policy paid out between $500 million and $750 million, according to Bloomberg Law, with Liberty Mutual alone absorbing at least $100 million and possibly $150 million.

The July article introduced the names of two other JPI policyholders: Quinn Emmanuel, a law firm that was ordered by a federal court to disclose evidence of its JPI policy, purchased to protect a $185 million fee award upon appeal, and cloud computing company Appian Corporation, whose $2 billion verdict against competitor Pegasystems was overturned on appeal. The Wall Street Journal reported that Appian “will get paid at least $500 million” from its JPI insurance policy.

Jonathan Stroud, General Counsel at Unified Patents, an organization formed to protect against frivolous patent litigation, alleged that another JPI policyholder is VLSI Technologies, whose $2.2 billion judgment in its infringement lawsuit against Intel Corporation was reversed on appeal in November 2023. “Evidence of the JPI policy has not been publicly disclosed, but it’s widely known to be insured…for $300 million,” Stroud stated in the July article.

While the article indicated significant capacity issues for JPI going forward, one of the brokers interviewed said he had two JPI policies “binding in the next two to three weeks in the mid-eight-figure range. Deals can still be done.”

Assisting the dealmaking is the financing of the premiums and a portion of the judgment or settlement by TPLF firms. In an August interview with Hartwig, he described the industry’s seeming intent to have it both ways as “cognitive dissonance,” the discomfort one feels when actions fail to align with values or beliefs.

“They’re clearly selling a policy that runs directly counter to their own interests. Either the insurers don’t completely understand the risk management implications associated with this product, or they’re being ‘played’ by the third-party litigation funders,” he said. “To me, it’s the equivalent of the banking industry offering a product financing the purchase of ‘getaway’ cars in a bank robbery while at the same time working to reduce the likelihood of a robbery occurring.”

Apprised of Hartwig’s comments in a Zoom call, Lundberg smiled, paused and then offered his own analogy: “It’s like the opportunistic police chief in [the movie], ‘Casablanca,’ who’s shocked to see gambling going on at Rick’s Café while taking possession of his winnings.”

In an August interview, Stroud was asked for his take on why the insurance industry persists in selling a litigation insurance product backed in part by the firms it regularly censures.

“The tension between the funders and the carriers is fascinating,” he said. “Clearly, the insurers are interested in offsetting a certain amount of the risk, which is where the litigation funders come into play.” He suggested that carriers are effectively collaborating with TPLF firms in providing JPI because other litigation insurance products have not sold well. “The market was anemic [until] capital became available from TPLF firms,” he added. “Despite some reports of a contraction, the JPI market appears to be doing just fine.”

An Unholy Alliance

Although carriers and legal finance firms derive mutual value from their unusual collaboration, the insurance industry’s campaign against TPLF has not dissipated. “Insurance is the lubricant that makes global GDP go, but at the moment it is contorted by social inflation—nuclear verdicts fueled in part by litigation financing,” Andrew Robinson, chief executive officer and chairman of Skyward Specialty, commented in an August interview. The commercial insurance provider serves industries like trucking coping with steep increases in insurance costs due to rising accident claim frequency and severity.

A couple months earlier, Robinson vented his concerns that TPLF firms were funding litigation products like judgment preservation insurance in a LinkedIn post that subsequently went viral, he said. “While many of us are working to combat the very real negative impacts of social inflation,” he wrote, “a large well-known insurer is profiting by insuring these litigation financers and plaintiff attorneys against financial shortfalls.” Robinson did not provide the name of the insurance carrier.

Aside from allegedly fueling sky-high judgments, the industry has attacked legal finance firms for the investors backing them. A 2023 Bloomberg article stated that sovereign wealth funds had made “significant investments” in two TPLF firms, one of them Burford Capital. A June 2023 press release by Burford announced the “expansion and further extension” of its funding arrangement with the unnamed “sovereign wealth fund strategic partner.” At present, there are no regulations requiring TPLF firms to disclose the identity of their investors. In July 2024, the House of Representatives introduced a bill to mandate disclosure of third-party litigation financing agreements in civil lawsuits.

“Disclosure of TPLF agreements, including the identity of potential downstream foreign sovereign investors, is the key to understanding the extent to which those investors are affecting IP [intellectual property] litigation outcomes in U.S. courts, or attempting to compromise patents through discovery,” said Stef Zielezienski, executive vice president and chief legal officer at the American Property Casualty Insurance Association, an industry trade group seeking TPLF investor disclosures

Zielezienski’s office emailed a 2022 report by the U.S. Chamber of Commerce Institute for Legal Reform, which cites a hypothetical scenario in which a China-backed sovereign wealth fund provides capital to a TPLF firm. The scenario postulates that the TPLF firm subsequently funds a lawsuit against a large U.S. technology company. In the discovery phase, the investors in the sovereign wealth fund become privy to highly confidential documents involving the technology company’s proprietary technology.

Burford Capital Vice Chair David Perla downplayed concerns over the firm’s investors, noting that many U.S. businesses have sovereign wealth fund investors and in Burford’s case, the sovereign investor is from a country that is a U.S. partner nation.

“The idea that a malicious foreign actor would use litigation finance to obtain trade secrets is preposterous,” said Perla. “A legal finance company providing funding for the litigation doesn’t have visibility into trade secrets revealed in discovery. Investors in the legal finance company, including sovereign wealth funds, are even further removed. …Foreign individuals own U.S. stocks all the time. It’s not unusual, and it’s not nefarious. On the contrary, it’s a sign that U.S. businesses are viewed by the world economy as stable, profitable and worthy of investment.”

You Pat My Back, I’ll Pat Yours

And so it goes, two combatants joining together to provide funding and coverage in an insurance policy absorbing eight-figure and nine-figure litigation losses yet squaring off against each other in the media circus. Burford’s Lundberg characterized the odd couple as a “love-hate relationship,” he said. “They love us when we’re on their side and hate us when we’re on the other side.”

Hartwig, however, is anything but bemused. “Not only do TPLF-funded JPI policies encourage the nuclear verdicts the industry so rightly condemns, it weakens insurers’ arguments against third-party litigation finance,” he said. “While the TPLF firms are doing nothing illegal, they’re exploiting the system to the industry’s detriment.”

Like other knowledgeable industry sources, Hartwig seeks legislative reforms that directly relate to actual economic damages, with enforceable caps or limits. “For example, if actual economic damages are $100,000, an award would be capped to never exceed twice that amount or three times that amount, not 50-times like we see today. Were that to happen, all these negative externalities like TPLF would be greatly diminished or fall away completely,” he said.

Would such reforms dissuade insurers from providing JPI policies generating substantial income for insurance brokers and carriers?

Given the monetary size of court judgments, it’s highly unlikely. BMC’s JPI policy, insured by Liberty Mutual for $500 million to $750 million, is a case in point. As Perla commented in the July article, JPI premiums “used to run 7 percent to 10 percent of the face value [of the policy] but is now moving into the teens to 20 percent.” Twenty percent of $500 million is $100 million, a tidy sum for carriers that generates ample brokerage commission to boot, suggesting the unholy alliance may continue.

Rumors are now circulating that insurers may become investors in third-party litigation funding. Bill Farrell, Managing Director and General Counsel at TPLF firm Longford Capital, said he has had “multiple meetings with insurance brokers and leading insurance carriers about the idea of investing in litigation finance.” Asked if the meetings have resulted in an investment, he replied, “I foresee the likelihood that both brokers and carriers will invest in third-party litigation funding.”

Such interest is not surprising, given the 20 percent and more annual returns of TPLF, one of the fastest-growing alternative asset classes. “Insurers invest in and know how to value risk.” said Perla. “It’s not inconsistent for them to say they want exposure to this asset class, from the standpoint of making money in areas where risk can be valued, whether it is judgment preservation insurance or contingent portfolio insurance or investing in a litigation finance company, public or private.”

Apprised of this head-scratching possibility, Hartwig said, “Any investment by insurers in TPLF would represent the completion of the industry’s circular firing squad on this issue. Worse still, insurers will likely experience a complete and total loss of credibility in the industry’s war against nuclear verdicts, with trial lawyers laughing all the way to the bank.”

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Claims was the focus of Carrier Management’s final print issue, including articles on social inflation, litigation funding, Generative AI, the future of auto insurance and more.

• Generative AI: A Double Agent Serving Good and Evil in the World of Claims
• Claims Satisfaction Leaders Reveal Secrets to Success
• Bumps Ahead as Disruption Drives Changes in Auto Insurance

Those articles are featured in CM’s fourth-quarter magazine, “Unite and Conquer: Industry Battles Social Inflation.” (Download a PDF for free access to all articles in the magazine or become a Carrier Management member to unlock every feature article we publish.)