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What is Adverse Judgment Insurance?

by | Feb 23, 2024

  • Adverse Judgment Insurance (AJI) is a type of policy that guarantees a certain amount of coverage in the event of a final, adverse judgment against a defendant. 
  • AJI is typically purchased by companies that are defending complex lawsuits where the potential damages are substantial and above the company’s existing insurance limits or risk tolerance.  
  • Think of it as a catastrophic commercial umbrella policy that is triggered after a final, non-appealable judgment. 

When is it Purchased and What Does it Cover?

  • Adverse Judgment Insurance can be purchased at any stage of litigation prior to a settlement being reached between the parties.
  • Generally, AJI does not provide coverage for settlement or defense costs. However, it can provide leverage during settlement negotiations because knowing that it’s in place reduces the pressure from unreasonable plaintiffs or their attorneys, who have an unrealistic expectation of the case’s value.

How Does Adverse Judgment Insurance Work?

  • To start the insurer will conduct an underwrite of the risk which usually requires substantial diligence.  This diligence includes looking for strong factual and legal issues, and also looking at the judge, the jurisdiction, the parties’ counsel as well as the appellate panel and the skill and experience of appellate counsel.
  • Once the insurer has completed the due diligence, 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.
  • Then the insured pays a one-time premium transfers up to 100% of the aggregate liability to the carrier.

What are the Key Benefits of Adverse Judgment Insurance?

  • First of all, it mitigates the risk of a catastrophic adverse judgment by ensuring that there is sufficient insurance coverage in place to pay all of the ultimate damages awarded against the company.
  • Facilitates M&A and financing transactions that are jeopardize by pending litigation by ring-fencing the liability for a known, fixed cost.
  • As mentioned earlier it also provides an advantage in settlement negotiations by removing some of the undue pressures that may cause a defendant to settle on less than favorable terms.  
  • And lastly, it provides certainty to help with budgets, forecasts, and expenditures so that companies can get back to business. 

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