Meaning
Financial risk management contracts that protect litigants from the high costs and potential liabilities of legal disputes help manage the financial volatility of court actions. The purchase of a litigation insurance policy provides coverage for the insured party’s own legal fees or the adverse costs they might be ordered to pay to their opponent. This insurance allows smaller firms to pursue valid claims against larger competitors without risking insolvency.
Types of Coverage
Underwriters offer policies that can cover expenses either before the lawsuit begins or after the legal action has been initiated. Before the event insurance covers potential future disputes, while after the event insurance is purchased once a specific claim is active. The premium for after the event coverage is often structured as a contingent fee that is only paid if the lawsuit is successful.
Risk Assessment
Insurance companies conduct a detailed evaluation of the legal merits and financial viability of the claim before issuing a policy. This due diligence process requires the applicant’s legal counsel to provide a detailed written assessment of the probability of success. Underwriters only accept cases that have a high likelihood of a favorable outcome and a clear path to recovery.
Strategic Advantage
Holding a policy strengthens a litigant’s position during settlement negotiations by demonstrating that they have the financial backing to see the dispute through to a trial. The opponent realizes that the insured party is not under financial pressure to settle quickly for a low amount. This backing helps level the playing field and can lead to fairer settlement outcomes for the insured claimant.
Additionally, it provides reassurance to the firm’s equity investors and lenders, who can rest assured that the potential costs of the dispute are capped and will not disrupt the company’s core operations or destroy its capital reserves.
