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How to Win More by Risking Less

by | Sep 27, 2022

In-house counsel and law firms have an unprecedented opportunity to apply systematic innovation to the way they approach litigation. For a fixed premium cost, it is now possible to pursue risk transfer on threatened or active litigation, portfolio risk, or work-in-progress, and in the process open up value in the form of increased certainty, efficiency, funding, and cash. Additionally, companies can monetize untapped litigation assets, thereby generating immediate revenue while removing the outcome uncertainty.

Put another way: it is now possible to win more by risking less.

The key for both law firms and in-house counsel is to embrace an innovative mindset as they approach their portfolio of cases. Here are three strategies–three new ways of thinking–to help make that happen:

1. Examine the Impact of Litigation on Your Assets

Litigation exposure can create a cash drain to cover litigation expenses, significant financial risk from known or pending litigation, and massive inefficiencies impacting a company’s P&L from settlement or judgment. Whether you are going to trial or you have already received an adverse judgment you plan to appeal, litigation requires time, money, and human capital. But what if you didn’t need to maintain reserves for your exposures? By transferring litigation risk, you eliminate the outcome risk, remove reserves, increase liquidity, and likely increase the company’s enterprise value all at the same time.

Here is a real-world example: We worked with a major, highly-leveraged manufacturer experiencing an exposure of $250 million. We assisted them in negotiating a $30 million settlement; but, reducing the top-line exposure was not its only obstacle. If the company signed the proposed settlement agreement, its auditors, applying well-recognized GAAP accounting principles, were requiring the company to post 100 percent of the liability on its P&L. This would have tripped its loan covenants, thereby accelerating all debt and forcing the company into bankruptcy. Using insurance, the company transferred the payout risk of the judgment to a carrier in exchange for a single premium at a fraction of the total judgment exposure. This creative risk transfer solution kept the company in compliance with its loan covenants, helped maintain shareholder value, and ultimately saved the company from bankruptcy or liquidation. It resolved legacy liability, recapitalized, and turned around the business. Risk transfer solved a substantial liability and saved that company.

This example underscores why our Class Action Settlement Insurance (CASI) and Litigation Buyout Insurance (LBO) can be uniquely advantageous for corporations and law firms. They create an asset that guarantees the payment of a liability. So, instead of tripping a loan covenant or having to account for a massive liability every quarter, it is possible to simply buy certainty with a one-time premium. You can offset even multimillion-dollar notional settlements or litigation from your balance sheet. Ultimately, the sooner businesses think of solutions like CASI or LBO in a litigation cycle, the greater their possible wins.

2. Consider Getting Insurance Before Funding, Not After

Funding opportunities have inundated the marketplace. Yet even as competition drives down prices, traditional litigation funding continues to be expensive for law firms and corporations. One reason is that most litigation funding is non-recourse debt based upon the outcome of uncertain litigation. Risk drives the cost.

Historically, companies seek litigation funding. Then, the litigation funders, in turn, look to the insurance markets to remove some or all the outcome risk. What if the process was reversed and the company or law firm obtained risk transfer of the outcome of the litigation first? Using risk transfer to guarantee the outcome of litigation, the cost of capital is lower, reflecting the outcome certainty and capital preservation provided by insurance. This approach is a win for companies and law firms seeking funding. Additionally, once the outcome risk is removed, the ability to obtain efficient, non-recourse funding is far more likely. At Risk Settlements, we can underwrite specific or portfolio litigation risk and then package insurance and funding to provide the optimal litigation finance structure.

3. Look at Untapped Litigation Assets

Too often, companies don’t realize that they can leverage their litigation portfolio like any other company asset. For example, we provided immediate monetization of contingent antitrust cases which generated immediate revenue for companies and removed all outcome and timing risk. By electing certainty, these companies received immediate value from an untapped asset that might not have been unlocked for a long time, and potentially, at a lower value.

The risk outcome is always binary for companies – win or lose – and it’s their job to be right 100% of the time. Sophisticated litigation underwriters can look for untapped sources in the market and use risk transfer to help clients turn what they view as having little value into immediate value. Quite simply, with risk transfer, we give our clients a way out of the trap of binary outcomes by solving for risk in a revolutionary new way.

The Future of Litigation is Results Without Risk

A decade ago, litigation funding was novel—now, it’s a given that the biggest law firms utilize big funders. Similarly, sophisticated funders are already using litigation insurance today. But many companies have yet to unlock all that litigation risk transfer solutions have to offer, whether it be newer companies looking for agile solutions that keep them on the cutting edge or established players looking to benefit from pure financial arbitrage. In either case, the future of litigation is securing winning results by reducing risk.

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  • Joel Fineberg

    Joel Fineberg is the co-founder of Risk Settlements and co-creator of Class Action Settlement Insurance (CASI)—the only post-lawsuit settlement insurance available to provide risk transfer of known settlement liability.

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