Adverse Judgment Insurance

Adverse Judgment Insurance (AJI) is a form of insurance that guarantees a certain amount of coverage in the event of a final, adverse judgment against a defendant. Generally, coverage under an AJI policy is triggered only after a final, non-appealable judgment. There can be no loss under the policy unless and until the judgment is final and there is no longer any chance of further appeal.

AJI is typically purchased by companies that are defending against complex lawsuits in which the potential damages are substantial and above the company’s existing insurance limits or risk tolerance.

Generally, AJI does not provide coverage for settlement or defense costs. AJI can, however, provide leverage during settlement negotiations, as it mitigates bet-the-company litigation risk against unreasonable plaintiffs (and their lawyers) who might have unrealistic expectations of the case’s value.

Stage of Litigation

Adverse Judgment Insurance can be purchased at any stage of litigation prior to a settlement being reached between the parties.

How It Works

First, consider whether your judgment is appropriate for AJI. The most insurable cases are those with solid legal and factual defenses. Other factors that are important for the insurer’s consideration are the jurisdiction of the pending litigation, the trial court judge, the parties’ counsel, the makeup of the appellate panel, the skill and experience of appellate counsel, the sophistication of parties, and the parties’ general litigation conduct. AJI also tends to be most suitable to companies facing multi-million-dollar judgments, because insuring smaller risks may be cost prohibitive for both the insurer and insured.

Once you have identified a case you think may benefit from AJI protection:

• The insurer will conduct an underwrite of the risk which usually requires substantial diligence.
• Once the insurer has completed the underwrite, it will usually engage in a Q&A with the insured (for any items that might need clarification).
• If the risk is insurable, the insurer will propose policy terms and pricing.
• A one-time premium transfers up to 100% of the aggregate liability to the insurer.

Key Benefits

• Mitigates the risk of an adverse judgment, ensuring that if the company’s worst case scenario plays out, there is sufficient insurance coverage in place to pay all or some of the ultimate damages awarded against the company.
• Facilitates M&A and financing transactions that are stymied by pending litigation by ring-fencing the liability for a known, fixed cost.
• Serves as a useful settlement tool if the opposing party no longer has the leverage that an adverse judgment will have a negative consequence on the company.
• Provides certainty to help with budgets, forecasts, and expenditures.