3 Questions For Litigator Turned Litigation Risk Insurance Broker (Part I)

It is imperative that IP lawyers educate themselves on the litigation risk insurance space.

Intellectual PropertyIt has been a while since my last interview, so I am pleased to have had the opportunity to discuss a very exciting development of great relevance to IP lawyers, particularly litigators and their clients, with someone who is right in the thick of the action. The development I am referencing is the rapid rise of litigation-related insurance products, which represent yet another step in the evolution of litigation investment as an asset class. This week, you’ll get to hear from Stephen Kyriacou Jr., a managing director and senior lawyer in Aon’s Litigation Risk Group, where he structures and places litigation risk insurance policies. Prior to moving to Aon, Stephen spent nearly a decade as a complex commercial litigator at Boies, Schiller & Flexner in New York, where he represented clients from diverse industries in domestic and international trials, appeals, and arbitrations across a wide array of practice areas.

Now to the interview. As usual, I have added some brief commentary to Stephen’s answer below but have otherwise presented his answer to my first question as he provided it.

Gaston Kroub: For the uninitiated, how would you describe what litigation risk insurance is and the elements that are needed for a successful insurance placement, particularly with respect to IP cases?

Stephen Kyriacou: When we talk about “litigation risk insurance,” we’re talking about minimizing or eliminating the financial risk associated with litigation by transferring that risk to the insurance markets.  The placements that we work on in Aon’s Litigation Risk Group often involve insuring defendants in active litigation against the risk of catastrophic damages and insuring plaintiffs who have won large judgments against the risk of reversal on appeal. We also insure a minimum return on investments in litigation-related assets as well as law firms’ expected fees on contingency cases. We can also provide more niche solutions like legal fee coverage in so-called “adverse costs” jurisdictions or for arbitrations proceeding under “loser pays” provisions, class-action settlement and “buyout” insurance, coverage for asbestos and other long-tail legacy liabilities, successor liability and fraudulent conveyance insurance, and judgment collection and enforcement coverage. Basically, if there is a litigation-related risk that can be established through underwriting as a low-probability, high-severity event, it may very well be insurable with the dozens of A-rated insurance carriers that Aon works with.

Generally speaking, the deals that we work on fall into two categories — single-case risks and portfolio risks. When we’re insuring single-case risks on the defense side, an adverse judgment insurance or “AJI” policy works like any other insurance policy. If you have a plaintiff seeking $100 million in damages and a policy providing $90 million in limits above a $10 million deductible, the insured is responsible for the first $10 million of any judgment against them while the insurers on the policy pay the rest, up to the coverage limits.

Increasingly often these days, we find ourselves on the plaintiff side, placing what we call judgment preservation insurance or “JPI,” where we insure lower court judgments or arbitration awards that have already been won by plaintiffs. A JPI policy effectively sets a guaranteed “floor value” recovery for these cases, assuming no collection risk associated with the defendant. A $90 million JPI policy on a $100 million judgment will guarantee the insured at least $90 million no matter what happens on appeal. If the judgment is affirmed, the insured will receive $100 million from the defendant; if the judgment is reversed in full, the insured will receive $90 million from the carriers on the policy; and if the judgment is reduced to, say, $50 million, the insured will receive $50 million from the defendant plus another $40 million from the carriers.

These sorts of single-case policies are bespoke and customized for both the insured party and the specific litigation being insured, and we have significant flexibility in structuring precise coverage terms. These policies do not permit insurers to take over the covered litigation; the insured retains decision-making power and continues to litigate with its chosen counsel. The “floor value”-setting function of a JPI policy can be extremely useful to judgment holders who are looking to monetize their judgment while an appeal is pending using a process that we call “insurance-backed judgment monetization.” That’s because the insurance effectively takes a contingent asset — in my example, a judgment that could be worth anywhere from $0 to $100 million depending on what happens on appeal — and gives it a fixed minimum value — in my example, $90 million.

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On portfolio risks, we’re usually looking at early-stage cases before any of the claims have been reduced to an award or judgment, and then insuring a minimum return on the investment that it takes to litigate those cases all the way to a lucrative, final, nonappealable judgment after trial.  The cases are typically cross-collateralized, meaning big returns from just a few cases in the portfolio can take the whole portfolio “off risk” for insurers once the minimum return has been met.  We can place these sorts of policies for litigation funders and other investors in litigation-related assets as well as for law firms with insurable contingency case portfolios.

In terms of what makes a successful insurance placement, litigation outcomes can be challenging to predict, and that’s exactly what insurers are trying to do when they write this coverage.  First and foremost, the case or cases to be insured need to be strong.  And we have to demonstrate that strength to insurers, which means we need sufficient information about the merits of the case. With JPI, we can typically present insurers with the full appellate record, which makes their underwriting comparatively easy, as they can review most or all of what an appellate panel will review in deciding the case. Defense-side risks, on the other hand, are typically more difficult to underwrite, at least until some meaningful discovery has taken place, because otherwise insurers won’t have access to the information that they need in order to underwrite the risk.

The motivation of the insured in seeking coverage is also a crucial element. This is not “bad case insurance,” and insurers are acutely aware of the potential for adverse selection. It’s also fundamentally important that our clients and their counsel work hand-in-hand with our team at Aon in getting the coverage placed.  Every litigation risk insurance policy that we bind is the result of a highly collaborative process, with lots of back-and-forth discussions and information flow between counsel for the insured, Aon, and the underwriters at the insurers.

These considerations are heightened when we are dealing with IP cases, which are one of the most common case types that insurers see, especially on the judgment preservation insurance front, given the massive verdicts in that space, as you wrote about a few weeks ago.  Most insurers don’t have in-house patent litigation expertise, so they must rely heavily on our team at Aon and on our clients’ IP litigators to provide them with a roadmap to their underwriting.  And as you also noted recently, there are just so many ways to lose a patent case. Insurers rightfully perceive the federal circuit as one of the most unpredictable appellate courts in the federal judiciary, and doctrines like patent eligibility, anticipation, and obviousness, not to mention the specter of PTAB invalidations, make it all the more important that IP risks presented to insurers are as strong and thoroughly underwritable as possible.

GK: There is so much to unpack in Stephen’s response, which is one of the most succinct, yet comprehensive, descriptions of the current state of play when it comes to litigation risk insurance that I have seen. As with gaining an understanding of litigation funding, I believe it is imperative that IP lawyers educate themselves on the litigation risk insurance space, if only to make sure that they are not doing their clients a disservice by failing to point them to insurance products that could benefit their position in ongoing or prospective litigation. Moreover, it is very interesting to consider how insurers look at big-ticket IP cases, which may not always align with the way that litigators evaluate those cases. These are still early days, but it looks like the impact of specialized insurance products for managing litigation-related risks will be with us for a long time — and will help both lawyers and their clients better evaluate the riskiness of their litigation escapades.

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Next week, we will hear from Stephen about where the opportunities for lawyers and their clients may lie with the rise of litigation insurance, as well as his thoughts on some of the lessons he has learned from the insurance placements he has made.

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.


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.