Judgment Protection Insurance Is Viable Even in a Hard Market

Judgment protection insurance was a hot new insurance product last year. Although the market has since become less favorable for buyers, plaintiffs should still consider purchasing JPI in some situations.

The insurance protects a plaintiff from losing a favorable trial court judgment on appeal. It sets a floor on the amount plaintiffs and their law firms can recover, strengthening their position in post-trial settlement negotiations.

Insurance companies, which don’t want to be seen encouraging plaintiffs to file frivolous cases, nevertheless could sell the insurance. That’s because JPI cases already exist, and there isn’t anything frivolous about protecting a plaintiff’s judgment that is unlikely to be reversed.

But the JPI market is retrenching. Buyers must pay more for less coverage, if they can get it at all. Some insurers have stopped writing JPI. Others have tightened underwriting standards, reduced the size of the limits they’ll offer, raised prices, and added new terms designed to align interests.

When would it be worth paying more money today for less coverage than you could have bought just a year ago? It can make sense for a plaintiff in at least three situations.

You won at trial, and the defendant knows you need the money now. You need JPI to break the defendant’s monopoly on the settlement. You won’t be able to get it for the full amount of the verdict, but you may be able to get enough to borrow the cash you need to hold out for a reasonable settlement.

You’re an ideal candidate because you’re looking primarily for liquidity, not risk transfer. Also, you’ll be fine with contract terms that align your interests with those of the insurer, such as a requirement that you accept a settlement offer above a designated amount.

With JPI in hand, you should be able to borrow more money at a lower rate than you could get from a litigation funder, solving your cash crunch.

The defendant is challenging the rule governing this case and future cases. This kind of defendant wants an appellate ruling, so they aren’t willing to settle. If you want or need to monetize some of your trial court victory today, you could be another ideal candidate for JPI.

Appellate courts rarely change the rules, so the odds of the defendant prevailing on the appeal are comfortably low. You’re mainly looking to get liquidity, not transfer risk to the insurance company, so you should be fine with those alignment provisions.

You have an emotional defendant who doesn’t want a reasonable settlement. This situation is like that of the defendant who is playing for the rules, but you may have to work harder to demonstrate to the insurer that you have a strong case.

JPI insurers tend to believe that defendants act rationally when it comes to money. What looks to you like irrational behavior may represent the defendant’s reasonable assessment of the appeal’s chances. If you can convince the insurer of the merits of your case, it could be worth paying those high premiums, depending on your other options.

In all three situations, the potential for delay makes you a better candidate for JPI and increases the value of the liquidity that the insurance facilitates. If you’re in a slow appellate jurisdiction, or if a remand is the most likely result of a reversal, you’re a better candidate because JPI insurers don’t have to pay until the very end of a case.

A long duration means the insurer earns more interest on your premium dollars, and there’s more opportunity for a settlement that takes the insurer off the risk, all other things being equal. If the insurance market works like it should, this retrenchment should be good for the long-term JPI market. The big losses driving the retrenchment will educate more lawyers and corporates about JPI, increasing awareness and stimulating demand.

Nobody likes paying big premiums, but there should be sufficient demand even at higher prices. That should bring new players into the market and stimulate companies in the market to increase their capacity.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Tom Baker is professor at University of Pennsylvania Carey Law School, where he teaches and writes about insurance, torts, and litigation finance.

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