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Winner-Winner: Preserving Your Chicken Dinner with JPI

GettyImages-182494032-205x300Judgment Preservation Insurance (JPI), also sometimes referred to as Judgment Protection Insurance, has become both more requested and available in recent years. As more plaintiffs seek ways to protect court judgments, more insurers are prepared to assume the risk of insuring such risks and so have entered the market and expanded capacity. As a result, what was formerly a niche insurance product has, of late, been more widely discussed and considered by prospective policyholders, raising the question of whether your company should consider JPI if you win a substantial sum in a trial court.

What Is Judgment Preservation Insurance?
JPI insures against the risk that a monetary judgment awarded at trial will not be paid or will not be paid in full because it was overturned or reduced on appeal. Brokers have described this product as converting a contingent asset into a fixed asset. In theory, a winner at trial who purchases JPI will receive at least an insured portion of the judgment regardless of the outcome on appeal, assuming the JPI claim is not denied.

For clarity, JPI policies do not generally protect against the risk that a judgment is not collectable, nor do they provide coverage in the event the plaintiff elects to settle for less than full value prior to a final non-appealable judgment. Finally, JPI applies only to monetary awards, not defense costs or defense verdicts (although Adverse Judgment Insurance now may be available to protect, at least in part, defendants facing a potential trial judgment).

How Does Judgment Preservation Insurance Work?
JPI policies are marketed as bespoke products but generally pay as loss some portion of the difference between the amount of a final non-appealable judgment and the amount of the original judgment, up to a specified limit of liability. This is sometimes called a “deficiency amount.” Total recovery varies based on the definitions, the self-insured retention, and any coinsurance.

Consider the following scenarios: Your company wins a $1 million judgment at trial. Insurers agree to issue a policy with a limit of $500,000. In addition, the policy does not have a retention. (This is unusual, as most JPI insurers want the policyholder to have “skin in the game” in the form of a retention.) No exclusions apply, and you have satisfied all conditions precedent to coverage.

Scenario 1: The judgment is overturned on appeal. Your company receives the limit of liability ($500,000) from the JPI and none from the original litigation defendant.

Scenario 2: The judgment is reduced on appeal to $750,000. Your company receives the $750,000 from the litigation defendant plus $250,000 from the JPI, covering the reduced judgment up to your policy’s $500,000 limit of liability.

Scenario 3: The judgment is upheld. JPI does not pay, but you can collect the full amount of the judgment from the defendant. Of course, your recovery is net of the agreed-upon premium.

For higher limits of liability, coverage usually is placed in a tower. This can lead to potential gaps if portions of the tower are not subscribed.

Why Consider Purchasing JPI Coverage?
There are several reasons to consider purchasing JPI coverage after obtaining a favorable judgment.

  • A JPI policy de-risks the appeal, at least in part. This can be especially useful where the defendant is unwilling to discuss settlement.
  • Where a settlement is possible, a JPI policy can level the playing field if the defendant views the prevailing party as cash strapped.
  • A litigation funder may request or require JPI coverage to protect its investment in the litigation.
  • JPI policies also can be used as collateral to monetize at least a part of the judgment. A growing number of banks will provide a loan to the prevailing party with a judgment (maybe even a non-recourse loan) based on JPI as collateral.

Note that premiums for JPI insurance are steep—typically in the range of 9-12% of the coverage purchased. That means if you had a $100 million verdict in hand and purchased JPI up to a limit of $50 million, your company might pay between $4.5 million and $6 million in premium. This cost might roughly approximate post-judgment interest during a period of appeal, depending on the levels of appeal and prevailing interest rates.

In addition, there are hidden costs to purchasing JPI. Insurers issuing JPI insurance undertake significant up-front diligence, as they are unlikely to insure a judgment they believe will fail on appeal. The time and expense associated with this due diligence can be considerable, especially if the underlying litigation or issues on appeal are complex. Key personnel may be required for diligence interviews, and litigation counsel may be required to provide insight into the opposing party’s litigation tactics and strategy.

Further, JPI coverage does not reduce the timeline for payment of a potential judgment because loss is only determined after a final non-appealable judgment has been issued. For example, a case remanded for trial following appeal will result in substantial delays before payment of any insurance monies under a JPI policy.

Finally, JPI coverage does not limit or mitigate the legal costs associated with an appeal or additional proceedings. And while the policyholder typically retains control of the litigation process, JPI policies often place a duty on the insured and its counsel to cooperate and associate with the JPI insurers in the appeal process. This can create additional overhead and could result in a threat to coverage (or at least additional expense and risk vis-à-vis the JPI) if the insurers second-guess litigation decisions and the policyholder ignores their “suggestions.”

Whether to Agree to JPI Policy Terms?
As noted above, JPI tends to be unique to each policyholder and situation, even though the structure and wordings of such policies thus far have been quite standard. JPI-specific policy terms vary between forms, and insurers are constantly revising and updating wordings as they become more familiar with the risks associated with underwriting these policies. That said, there are several key issues to consider when deciding whether to agree to proposed JPI policy wording.

First, the definitions tied to the calculation of the loss can be unclear or imprecise despite the simplicity of the policy’s purpose. Insureds should carefully review the relevant definitions to ensure that the manner in which loss is established and calculated is clear and unambiguous.

Second, JPI policies typically have only one exclusion: fraud or misrepresentation during the underwriting process, memorialized in the statement of material facts section of the policy. This exclusion is generally worded in favor of the policyholder, requiring proof of actual knowledge of facts that were deliberately misrepresented. In more favorable policy forms, the insurer must prove by “clear and convincing evidence” both that the insured was aware of the misrepresentation and the insurer was materially prejudiced by the misrepresentation. More recently, insurers have dropped the clear and convincing evidence standard (which is a very high bar in most jurisdictions) and adopted the more common preponderance of the evidence standard.

Third, as part of the underwriting process, insureds are required to submit a “statement of material facts.” As mentioned above, this process can be time consuming and costly, especially if counsel are involved. The policyholder should work to ensure that the material submitted is as accurate as possible to minimize the possibility of the insurers seeking to bar coverage on this basis. Depending on the timing of the purchase of JPI, it may be unclear exactly what arguments defendants will raise on appeal, which could open the door to claims by the JPI insurers that key facts were withheld or misstated.

Judgment preservation policies present an interesting and potentially valuable tool for prevailing parties to protect and, if necessary, monetize trial court monetary awards. But it is incumbent on potential insureds to verify that their underlying materials are accurate and the JPI policy wording is precise to minimize the risk of this insurance product not providing bargained-for coverage and security after the payment of a hefty premium.