Intellectual Property

Following Up With A Litigation Risk Insurance Broker (Part II)

The litigation risk insurance market is going through a very quick maturity process.

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Intellectual PropertyThis week, I continue my written interview with Stephen Kyriacou Jr., who is  a managing director and senior lawyer in Aon’s Litigation Risk Group, where he structures and places litigation risk insurance policies. Last week, Stephen shared a fantastic primer on the existing market for litigation risk insurance, including the explosive growth in the market over the course of 2023.

Now to the remainder of my interview with Stephen, starting with his answer to my second question. As usual, I have added some brief commentary to his answer below. 

Gaston Kroub: Have there been any challenges or headwinds in the litigation and contingent risk insurance market over the past year to 18 months, particularly with respect to IP litigation?

Stephen Kyriacou: Well, it is the insurance business after all, and in our world, insurers are underwriting the outcome of active litigation — often very complex, high-profile, high-dollar litigation — so it was always inevitable that there were going to be claims on these policies. These cases also tend to take a long time to wend their way through the courts, such that in the early days of the market, there were a lot of policies that were still “on-risk” and only a few that had come off of the insurers’ books, one way or the other — either with or without a claim on the policy. In the past year or two, we have started to see some increased claims activity, which is naturally shaping how insurers view the newer opportunities that are being presented to them by brokers like myself.

We’re aware of several claims having been paid out in the market over the past year or two, including some sizable claims, and we’re not aware of any insurers challenging those claims. That supports what we’ve always said about these policies — that the coverage and claim payment terms are straightforward, and effectively boil down to an elementary school-level math problem. If you’re a defendant in a $100 million lawsuit and purchase $75 million of coverage above a $25 million “retention” or deductible, you retain the first $25 million in any liability and insurers take on the next $75 million. And if you’re a plaintiff with a $100 million judgment and purchase $75 million of coverage with a $25 million retention, there’s no coverage for the first $25 million of damage award reduction, but insurers are on the hook for any reduction beyond that. There’s nothing to debate about the math on policies where “loss” is defined like that, there really isn’t much to debate about whether or not a judgment is final and non-appealable (which it needs to be in order for coverage to be triggered), and the only exclusions in these policies tend to be for fraud or misrepresentations by the insured in obtaining the coverage and failure to zealously litigate as a prudent uninsured party would, and we’re not aware of any insurer contesting a claim on one of these policies on the basis of either of those exclusions.

Aon thankfully hasn’t seen any claims hit our book in 2023, but we had a claim on a judgment preservation insurance policy in late 2022 where the insurer’s response was instructive and encouraging. The insurer there didn’t look for ways to get out of paying the claim; they immediately acknowledged that the claim was valid and payable, and simply wanted to get on the phone with our client to better understand exactly why the case came out the way it did and what they, in their words, “got wrong” in their underwriting, so that they could learn lessons that they could then put to use as they write other policies going forward. (And for what it’s worth, I think all the parties to that particular policy at the end of the day agreed that the answer was simply that the appellate court got it wrong, not the insurer, which is unfortunately something that can happen with cases that, at the end of the day, are decided by fallible human beings who can sometimes get things wrong and who may bring their own biases and preconceived notions into judging — if it didn’t, there would be little need for insurance.)

Outside of actual claims on these policies, there have been some adverse interim developments in insured litigations across the broader market that have not yet led to claims, given that this coverage is almost always “final judgments-only” and these cases are still making their way through the courts and have not yet gone final. Those litigations will take more time to develop before the industry sees how they ultimately turn out, but the increase in claims activity and the adverse interim developments that we’ve seen in certain insured litigations have had an impact on the market. We’re seeing some rate hardening across the board, reduced line sizes from certain insurers, and increased underwriting fees and longer placement timelines as insurers task their outside counsel with deeper dives into diligence. Litigation and contingent risk insurance deals, by their very nature, are never easy to get done — even for what appear to be the most straightforward and pristine risks — and they have become more challenging to get done recently, even with more insurers in the space and more litigation-focused underwriters at those insurers. We work hard to help our clients understand the state of the market and the likely pricing and deal timing at the outset of the placement process so that they can weigh the risks and benefits of going down the road of pursuing insurance. And while all of this can make our jobs as insurance brokers more difficult than it was a few years ago, it’s overall a good thing for the long-term health and well-being of the market.

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Judgment preservation on IP litigation is an interesting example, and an area of the market where we’re seeing perhaps the greatest challenges. Some insurers now say they will not consider judgment preservation insurance risks for patent infringement cases that involve Section 101/Alice issues or that have pending IPR proceedings or the specter of potential IPR proceedings in the future, and some insurers just consider patent infringement JPI deals to be a total “no-go zone” given that many of the adverse developments that we’ve seen in the space have involved such cases. This increasing reticence is also driven by the perception that the federal circuit’s jurisprudence has been inconsistent, with the risk profile of cases going up to the federal circuit boiling down to “panel risk” more than anywhere else in the country — meaning that which judges end up being randomly assigned to a case may have a greater impact on the outcome of the case than the actual merits. While most carriers in the space will still insure patent infringement cases on both the plaintiff side and the defense side, and while it is still the area where we see perhaps the most client interest in plaintiff-side judgment preservation insurance, those deals have gotten significantly more difficult to place in recent months.

Another challenging area remains insuring litigation funders and contingency fee law firms. As the market has hardened for single-case plaintiff-side judgment preservation insurance and defense-side adverse judgment insurance risks, we believe that there is significant benefit to insurance companies in insuring portfolio-based risks that cross-collateralize many different, often uncorrelated litigations as a means for minimizing insurer risk concentration. But the buyers of those sorts of policies typically are litigation funders or other investors in litigation-related assets, as well as contingency fee law firms, and there remains substantial resistance among certain insurers and reinsurers to insuring those types of risks for those sorts of insureds. These insurers generally do not want to provide coverage for funders and plaintiff-side lawyers because the broader insurance industry provides coverage for defendants in many funded and/or contingency fee-based cases, as well as because they perceive that litigation funding of plaintiff-side law firms is driving so-called “social inflation” or “nuclear”/“runaway” jury verdicts. While that debate is likely to continue for some time, there are thankfully a good number of insurers who are willing to underwrite these sorts of risks, and who are excited to partner with us and with our litigation funder and plaintiff-side law firm clients on creative solutions that benefit both insurers and insureds, and we continue to seek out these sorts of portfolio-based opportunities so that we can expand the range of available insurance solutions and better cross-collateralize the litigation and contingent risk insurance books of our insurer partners.

GK: As Stephen tells it, the litigation risk insurance market is going through a very quick maturity process, both in terms of communicating more clearly what types of litigation risks are insurable, while also focusing on risk abatement approaches that will hopefully expand over time the number of insurers willing to offer these types of policies in the future. It is heartening to hear that insurers and brokers are working together to maintain high standards in terms of diligence and risk assessment, even as there is increased interest in these types of insurance products, particularly on the patent side. A healthy insurance market is important for a healthy patent litigation ecosystem, so we can hope to see continued engagement, creativity, and improved performance from insurers operating in this space through 2024 and beyond.

Due to the importance of this discussion, stay tuned for the concluding, third part to the interview next week. In the meantime, I am always open to conducting interviews of this type with other IP thought leaders, so feel free to reach out if you have a compelling perspective to offer.

Please feel free to send comments or questions to me at gkroub@kskiplaw.com or via Twitter: @gkroub. Any topic suggestions or thoughts are most welcome.

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Gaston Kroub lives in Brooklyn and is a founding partner of Kroub, Silbersher & Kolmykov PLLC, an intellectual property litigation boutique, and Markman Advisors LLC, a leading consultancy on patent issues for the investment community. Gaston’s practice focuses on intellectual property litigation and related counseling, with a strong focus on patent matters. You can reach him at gkroub@kskiplaw.com or follow him on Twitter: @gkroub.

 

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