Contingent risk insurance
September 2024 | TALKINGPOINT | MERGERS & ACQUISITIONS
Financier Worldwide Magazine
September 2024 Issue
FW discusses contingent risk insurance with Shai Silverman at CAC Specialty.
FW: Could you provide an overview of contingent risk insurance and how it works?
Silverman: Contingent risk insurance creates certainty out of uncertain legal assets or legal liabilities through A-rated insurance solutions, using insurance to secure core values to legal assets or limit legal liabilities. On the plaintiff’s side, contingent risk insurance can ensure a minimum recovery on a single case or portfolio of cases, enabling strategic planning and creating the potential to monetise those assets by borrowing against the policy on attractive terms. On the defence side, contingent risk insurance can set a ceiling on legal exposures, including both current and potential lawsuits. This allows policyholders to achieve long-term business objectives without fear of unexpectedly large legal liabilities.
FW: When should a company consider contingent risk insurance as a potential solution?
Silverman: Contingent risk solutions work best when companies are motivated not just by a straightforward risk-transfer, but also by the need for certainty with respect to legal assets or liability to achieve big-picture strategic objectives. These can include facilitating an underlying transaction, mitigating concentration risk, cash-flow smoothing, and reducing cost of capital, among others. Entities facing uncertainties from litigation that impede their strategic objectives should seriously consider contingent risk insurance. It is crucial not to delay. The insurance solution almost always works best when an insurer is engaged early in the company’s strategic planning, allowing it to develop a tailored solution that aligns perfectly with needs and objectives.
FW: Could you explain how contingent risk insurance benefits companies facing potential legal exposures?
Silverman: Defence-side contingent risk solutions offer certainty around legal liabilities by cabining potential exposures. These adverse judgment insurance policies reassure policyholders that they will not face runaway jury black swan exposure. These products are used most often in the M&A context where a target has a known legal liability with high notional value but minimal risk. In such cases, the buyer may demand an escrow to cover the potential liability, which threatens to scuttle the deal. Instead, a contingent risk insurance policy can replace the escrow, covering unexpected large liabilities and allowing the transaction to proceed. These solutions are beneficial in other contexts as well, such as refinancing debt or distributing fund proceeds, whenever a known yet uncertain legal exposure hinders business objectives.
“The future of contingent risk insurance is very bright. In particular, the ongoing and rapid evolution of portfolio solutions continues to unlock vast untapped potential for the product.”
FW: On the flip side, how does contingent risk insurance assist plaintiffs?
Silverman: On the plaintiff side, contingent risk insurance products insure core values to contingent legal assets. These can cover single cases by insuring a portion of a verdict against the risk that it is overturned or reduced on appeal. They can also cover portfolios of legal assets, insuring deployed principal or a core value of expected proceeds over a set duration on a cross-collateralised basis. Policyholders are often motivated to purchase these solutions to facilitate a monetisation. By insuring a core value of a legal asset, policyholders convert an uncertain asset into investment-grade collateral, thus radically reducing the cost of capital for a related financing. But there are numerous other ways in which contingent risk insurance can help legal asset holders as well, including by mitigating concentration risk and facilitating big-picture business planning, among other things.
FW: Could you provide further insight into contingent risk insurance portfolio solutions? What are they, when do they work, and how?
Silverman: Legal portfolio insurance is the fastest-growing part of the contingent risk insurance landscape. These policies wrap a cross-collateralised pool of legal assets, insuring a core value across the assets as a package. They often include a duration term, allowing policyholders to make a claim if the assets do not generate proceeds exceeding policy limits by term’s end, regardless of case resolution. Common buyers of portfolio insurance are litigation funders seeking to insure a portion of their capital across a fund, plaintiff’s law firms seeking to insure a core value of their contingency-fee docket, which is often to secure improved loan or refinancing terms, and intellectual property (IP) aggregators seeking to insure a core value across an IP campaign or group of campaigns. Portfolio policies are particularly appealing for legal asset holders seeking loans. By mitigating duration risk, these policies can offer significantly better credit rates than those otherwise available in open credit markets.
FW: What are some of the key features of contingent risk insurance policies?
Silverman: Contingent risk insurance policies differ significantly from traditional insurance policies. They are custom-drafted for each deal and typically span five to seven double-spaced pages. These streamlined policies focus on a single equation: how did the underlying legal assets or liabilities perform, and does that performance trigger a loss? Contingent risk policies do not contain foot-fault provisions that can lead to insurers denying coverage. Normally, they include a single substantive exclusion for fraud by the insured, though deal-specific exclusions may be negotiated. When a policy pays depends on the nature of the case in question. Most single-case policies are triggered upon final adjudication, meaning a claim can only be made once the underlying dispute is fully resolved. Portfolio policies, by contrast, often include a duration allowing the policyholder to make a claim once the policy period expires, regardless of whether the underlying cases are resolved at that point.
FW: Looking ahead, how do you expect contingent risk insurance to evolve?
Silverman: The future of contingent risk insurance is very bright. In particular, the ongoing and rapid evolution of portfolio solutions continues to unlock vast untapped potential for the product. Fundamentally, the legal credit landscape will benefit from a product that can generate investment-grade collateral out of contingent legal assets. Litigation funders, law firm lenders, plaintiff’s law firms – anyone who lends against or invests in legal assets – should think carefully about the ways in which contingent risk insurance can help mitigate the riskiest aspects of the asset class and facilitate a much more efficient flow of capital. In addition, there are many investors who may appreciate the attractiveness of litigation as an asset class, such as its non-correlated nature and high upside, but have steered clear of these assets because of perceived inherent riskiness. Contingent risk insurance can offer these investors an entrée into the space by considerably reducing volatility across the asset class as a whole.
Shai Silverman is a senior vice president on the contingent risk team at CAC Specialty. Prior to joining CAC, he was an appellate litigator in New York City. He is a graduate of Columbia University and Yale Law School, and clerked on the US Court of Appeals for the Fifth Circuit in New Orleans. He can be contacted by email: shai.silverman@cacspecialty.com.
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