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This 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 some of the specific challenges inherent in assessing patent litigation risk. This week, I will get into a little more detail with Stephen on the exciting possibilities for those fortunate enough to secure litigation risk insurance.
Now to the remainder of my interview with Stephen. As usual, I have added some brief commentary to the answers below but have otherwise presented his answers to my questions as he provided them.
Gaston Kroub: What opportunities does litigation risk insurance offer to both lawyers and their clients?
Stephen Kyriacou: Our team at Aon believes that it is essential for lawyers — both litigators and transactional attorneys — to familiarize themselves with the different litigation risk insurance solutions available in the marketplace today. We speak to lawyers all the time who have never heard of this insurance and who have no idea that these solutions even exist. My colleague Stephen Davidson and I actually wrote a piece late last year titled, “Litigation Risk Insurance: A Tool That Should Be In Every Lawyer’s Toolkit” to try to address this lack of knowledge among practitioners.
Historically, this knowledge gap has been understandable because these sorts of policies were not commonplace. But in the last two years or so, the litigation risk insurance market has exploded with activity, and the solutions that we offer have evolved significantly, becoming more responsive to client needs. I am obviously biased here, but I think it’s fair to say that we are now at the point where an attorney who doesn’t know and can’t advise their clients about litigation risk insurance will be doing their clients a disservice, and will be at a disadvantage compared to those attorneys who are well versed in these solutions and can offer that kind of advice and counsel to their clients. That’s because this sort of insurance can deliver a lawyer’s client the sort of comfort that the lawyer themselves cannot normally provide consistent with their professional obligations: that even if they lose a given case, the financial impact of that adverse result will be limited to the deductible on their insurance policy, and any impacts beyond that will be borne by the insurers, within the coverage limits.
Litigation risk insurance has many potential use cases. On the plaintiff side, judgment preservation insurance can lock in the value of a judgment, which among other things can bring about significant accounting benefits, and, as we previously discussed, can also be used to monetize a judgment at a very attractive cost of capital through an insurance-backed judgment monetization. And that goes not only for the named plaintiff in a litigation, but also for their contingency fee counsel, as we have done a number of placements where we insured a law firm’s contingency fee share of a judgment.
On the defense side, adverse judgment insurance is typically deployed in situations where our client has a strong case but cannot dispose of the underlying litigation right now, which is to say that the client can’t settle the case on acceptable terms, or can’t dispose of the case on a motion to dismiss, and winning on the merits is going to take time. In the meantime, the threat of potentially significant or catastrophic damages is getting in the way of doing business. We often see the coverage used to facilitate M&A transactions by allowing companies that are defendants in active litigation (or have been threatened with litigation) to cap their damages exposure prior to being acquired, at a much lower cost to the parties than putting the full damages amount sought by plaintiffs into a locked-up escrow with an indemnity. Successor liability and fraudulent conveyance coverage can also be extremely useful in the M&A context, as can be legacy long-tail liability insurance coverage when the company being acquired is saddled with asbestos, talc, or other similar liabilities.
GK: As the insurance market for litigation risk continues to develop, the need for IP lawyers to keep current in their knowledge of what is available — either for their firms or their clients — will become even more acute. It can be difficult, particularly for busy lawyers, to take the time out and learn all about a new market offering, irrespective of how that market offering may be for their practice or their clients. But there are ways to get quickly educated. One approach is to task at least one of the firm’s lawyers to become the point person when it comes to litigation risk insurance — both in terms of staying current on market developments, but also to initiate and maintain strong relationships with the folks like Stephen who stand ready to assist lawyers to explore their insurance options. There are other potential shortcuts to consider. What is important, however, is that whatever knowledge gap exists at a firm about litigation risk insurance gets bridged with all dispatch.
GK: What is the most important thing that you’ve learned about the litigation risk insurance market based on the deals you have done so far?
SK: The most important thing that I’ve learned in the three years or so since I left private practice is that the insurance companies that play in this space, and the solutions that my team at Aon works with those insurers to craft, have an incredible ability to be responsive and adaptive to client needs. Many of the solutions that we offer — adverse judgment insurance, judgment preservation insurance, insurance-backed judgment monetization, you name it — have come about because a client had a need for some sort of risk management tool and because folks in this industry have stepped up to find creative, workable, mutually advantageous ways to address those needs with insurance capital. And once we find something new that meets a client need, it often tends to get replicated and become market standard.
We see that creativity in addressing client needs in some of the insurance policies that we have bound that don’t fit neatly into the adverse judgment insurance or judgment preservation insurance categories. For example, we have insured defendants who have lost significant trial judgments against the risk that those judgments will be affirmed on appeal, meaning that insurers were essentially counting on those judgments being reversed. We have also insured plaintiffs in active litigation against the risk that they will fail to recover the amount that they expect to win despite those cases still being in very early stages. We have done the same for funders investing in early-stage litigation. Along the same lines, insurers are now starting to come around to the prospect of insuring not only the principal invested by litigation funders and other investors in litigation-related assets, but a portion of those investors’ anticipated upside, too. And the portfolio solutions that I mentioned earlier, which have seen tremendous growth, are yet another example of how this industry can rapidly adapt to address client needs, and to spread the risk inherent in high-stakes, high-dollar-amount litigation in a way that makes sense for everyone involved.
It all comes back to underwritability. As you can probably imagine, working at a company like Aon, which has more than 50,000 employees spread across more than 120 countries, our clients are in every imaginable industry and are involved in nearly every kind of litigation, so we see a lot of different inquiries for litigation risk insurance coverage. Whenever a new opportunity comes in, our team of former litigators and investment bankers rolls up our sleeves and analyzes that specific litigation risk to determine whether it can be underwritten. Ultimately, all that we need to obtain this coverage is a demonstrably strong case and a client motivation that makes sense, even if the litigation is something that we’ve never seen before or if the sort of policy that the client needs would be different than anything that has previously been written by insurers. This industry and its solution-oriented participants have proven over the past few years that they are up to the challenge when it comes to finding ways to bring low-cost insurance capital to bear on the different litigation-related situations in which our clients find themselves.
GK: As Stephen tells it, the ingredients are all there for a future explosion in uptake for litigation risk insurance. Sure, the process of getting that insurance may be involved, especially the first time around, but so is litigation itself. Over time, I would imagine that firms will start to develop strong relationships with insurance brokers — and maybe even insurers themselves — just as we have seen happen in the litigation finance space. And just as litigation funding deals have changed considerably over the past few years, so too should we expect that litigation risk insurance products will become even more refined and useful to IP lawyers and their clients. It is early days yet.
My thanks to Stephen for the insights and cooperation, especially for his willingness to educate this audience about the fast-moving space that he and his colleagues operate in. I wish him the best of luck in all of his ongoing endeavors.
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.
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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