It is not just your imagination: verdicts are getting bigger. So-called “nuclear verdicts” have increased in size and frequency over the past decade, particularly after the COVID-19 pandemic. Litigation risk insurance is a little known, but highly effective, option meant to compliment traditional insurance products and provide additional protection for policyholders nervous about litigation exposure.

Unfortunately, it is difficult to predict the exposure presented by any particular case. Between 2020 and 2022, the median verdict increased 95%—from $21.5 million to $41.1 million. In 2022, a jury handed down a verdict worth $7.3 billion for injury to a single plaintiff. Even if an injury or loss is minor, juries have shown that they are willing to penalize corporate defendants with punitive damages that significantly exceed the award of compensatory damages. With such uncertainty and millions (if not billions) at stake, companies can reduce risk with litigation risk insurance.

Three key types of litigation risk insurance include: (1) punitive wrap insurance, (2) adverse judgment insurance, and (3) judgment preservation insurance. 

Punitive (“Puni”) Wrap Policies. Punitive wrap policies reduce the risk of punitive damages, which often present the greatest exposure yet remain the hardest exposure to predict. Punitive damages, meant to punish a defendant for perceived wrongful conduct or deter others from engaging in similar conduct, can exceed the amount of compensatory damages by several times. Worse still, in some jurisdictions where punitive damages awards are highest, punitive damages are uninsurable as a matter of law: think California, New York, Florida, and Pennsylvania. Even if a policy specifically covers punitive damages, it may not pay punitive damages if the policy is subject to the laws of these states. 

Punitive wrap policies are issued by insurers who provide both a standard (“lead”) policy that pays defense costs and compensatory damages, and an accompanying punitive wrap policy that pays punitive damages. The punitive wrap policy pays punitive damages only if the relevant law prohibits the lead policy from paying punitive damages. 

Adverse Judgment Insurance. Adverse judgment insurance protects companies that have already been sued and might be worried about the impact of a particular verdict on its bottom line. Adverse judgment insurance reduces or eliminates the amount of a verdict that the policyholder will have to pay out. In prospective mergers or acquisitions, companies can become more attractive to potential buyers by offloading litigation risk into an adverse judgment policy. If the policyholder has earmarked certain funds to pay a judgment, an adverse judgment policy can free up cash flow. Adverse judgment insurance can also help settlement, either as collateral for a loan to settle a case, or as proof to the plaintiff that the defendant will proceed to trial unless it settles below the point where the adverse judgment policy kicks in. 

Judgment Preservation Insurance. Unlike the other policies mentioned above, judgment preservation insurance protects plaintiffs. By the time they obtain a verdict, plaintiffs may have incurred untold number of expenses that need to be paid out. Verdicts are often appealed, and appeals can take months, if not years. Rather than hold this money until appeals exhaust, plaintiffs can obtain judgment preservation insurance for the amount of the verdict and spend that money immediately. If the verdict is overturned, the policy will cushion the amount the plaintiff must pay back. The Federal Circuit recently ordered a law firm to disclose a judgment preservation policy that it purchased to protect a $185 million fee award while appeals were pending.

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Litigation risk insurance can fill critical gaps in a comprehensive risk management strategy. When negotiating litigation risk insurance, policyholders should carefully read insuring agreements to make sure they are broad enough to encompass the relevant risks they are trying to insure and be wary of any limiting language or conditions. Given the highly custom nature of litigation risk insurance, policyholders should consult experienced coverage counsel to make sure they are getting the best possible coverage.

For more analysis of litigation risk insurance, consult Buying Certainty in an Uncertain World Through Litigation Risk Insurance.