New Trends in Managing Litigation Outcomes: Litigation Risk Transfer Arrangements

Effectively managing litigation risks entails understanding what litigation risk transfer vehicles are available to companies. The most apparent way to transfer risk is obtaining appropriately comprehensive liability insurance prior to a claim being filed. Today’s sophisticated legal market brings new ways to allow a company to hedge liability, limiting exposure in connection with even pending litigation. In this episode, Dorsey Partner/Podcast Host Kent Schmidt, along with Kevin Skrzysowski and William Marra of Certum Group, explore how litigants can use these litigation risk transfer products when facing bet-the-company litigation claims, or for those on the plaintiff side, reduce the potential of losing out on a litigation investment. 

This podcast is not legal advice and does not establish an attorney-client relationship or create any duty of Dorsey & Whitney LLP or those appearing in this podcast to anyone. Although we try to assure that the content of this podcast is accurate, comprehensive, and reflects current legal developments, we do not warrant or guarantee those things. The opinions expressed in this podcast are the opinions of those appearing in the podcast only and not those of Dorsey & Whitney. This podcast is considered attorney advertising under the applicable rules of certain states.

Transcript

Voiceover
Welcome to another episode of the SharkCast on litigation risks management, where we explore why businesses are so frequently sued, and how to mitigate and navigate the dangers lurking in these risky waters. Join us now as we welcome our host, Kent Schmidt, litigation partner at the law firm of Dorsey & Whitney.

Schmidt
Thanks for joining us today on another episode of SharkCast. In the episodes we recorded in the past, and those that we are releasing in the near future, we discuss, or will be discussing, how to mitigate litigation risk prospectively. Primarily, we’re talking about modifying business practices, changing contract provisions, and engaging in other due diligence in order to sidestep potential liabilities. We’re talking about doing this when the waters are calm, but there are also ways to think about managing litigation risk in the middle of a crisis, in the middle of a litigation claim. In this episode, we’re going to expand the aperture on this concept a bit more and talk to our guests today about litigation risk transfer strategies as well as some related investment products that are connected to understanding and managing litigation risk on the defense side as well as the plaintiff side. To explore this topic in great depth, I am pleased to be joined today in the SharkCast studios be two guests, Kevin Skrzysowski and Will Marra. Welcome Kevin and Will, glad to have you here.

Skrzysowski
Thanks so much for having us, we appreciate it.

Marra
Yeah, thank you, great to be here.

Schmidt
Excellent, well, welcome to you both. Kevin and Will are both with a company called Certum Group, and one of you, perhaps, can get us started with telling us in, as we call it, the elevator pitch, what Certum Group is, and you can take the full 20 floors for this elevator; this is not a five-floor elevator.

Skrzysowski
Thank you Kent, I would be happy to. So, basically, Certum Group is a full service litigation consulting firm, and what I mean by that is that we have a very large suite of litigation risk transfer solutions. In that suite, we have insurance products specifically designed for the defense and defending businesses. We have other insurance products that are specifically designed for plaintiffs or plaintiffs’ counsel. We also work with businesses to monetize any latent litigation assets they may have or claims they may want to bring against other companies, but they don’t want to use their own money so they’re looking for an immediate monetization or a boon to their balance sheet. We also do things like nonrecourse litigation funding, and then in addition to insuring individual matters, we also will do portfolio wrappers or sometimes what is formally referred to as capital protection wrappers. And then lastly, we also do premium finance as well, so it’s a pretty big mix. We’re pretty uniquely positioned in the market in that we have both insurance partners and capital partners, which we’ll get into a little bit later. In terms of the team, I jokingly say that there are a lot of recovering attorneys over here. So, we have a lot of folks who worked for Am Law 100 firms, we have attorneys who’ve worked for some elite plaintiff’s litigation boutiques, some of my colleagues clerked for federal district court judges. Will clerked for the United States Supreme Court. We also have investment bankers and we have folks who were insurance executives and underwriters and, basically, we work together to design bespoke litigation risk transfer solutions for businesses and their counsel.

Schmidt
That is a great summary. You used a lot of terms that, until recently, I was very unfamiliar with, and I think some of our even seasoned attorney listeners might be unfamiliar with some of those terms. So we’ll break those down shortly. And Kevin and I connected a few months back talking about consumer class actions, which I do a fair amount of that work, and some of the products that are specifically tailored for consumer class action risk. But anything litigation risk-related sure piques my interest. And so I’m very pleased to have both of you to join us today. Let’s jump right in. We’re all familiar with a concept of buying insurance when the waters are calm, and we’ve covered a lot of that, including one of the very early episodes of SharkCast we examined with my partner, Skip Durocher, general liability policy gaps, looking at exclusions and learning how to use insurance as an asset. But what are the products that are available when a claim has been filed? You spoke a moment ago about risk transfer insurance. How does this work on the defense side with a litigation buyout product?

Skrzysowski
Right, so let me, I’ll do a little quick overview of the defense side solutions. So, there’s litigation buyout insurance. We also do offer class action settlement insurance, which we created with Cassie, and then we also offer adverse judgement insurance. Now, all of these are available when the house is already on fire, the car is already in the ditch, so to speak. So, litigation buyout insurance is a way that businesses can ringfence all over the risk and cost of any, really any type of underlying litigation when they need to expunge it and they can transfer that to a third-party carrier in exchange for a one-time premium to a bespoke policy.

Schmidt
Let me interject right there, Kevin. And, maybe, it would be helpful if I sort of painted a hypothetical here. We can use it as an example, you can tell me, a bit, about how this works.

Skrzysowski
Sure, sounds good.

Schmidt
Suppose I am the general counsel of a company that has been slogging it out in some no-holds-barred litigation and what by all appearances is gonna be a two-year lawsuit. I’ve told the board of directors that this is a $30 million worst-case scenario and that we can expect to spend about $2 million in legal fees and costs with experts and so forth over the next year. We’ve examined whether there are any counterclaims, there aren’t. So, this only has downside, no upside for us. Let’s suppose further that I expect, and have told our board, that we think there is only a 10% chance of the plaintiff prevailing and giving their $30 million or more, but normally we’d just continue to slog it out. We’d continue down the road and hope for the best and try to eliminate this 30, we’ll call it a $32 million liability if we think about the fees we’re going to be spending. The only problem is the company needs to raise some financing and the private equity firm that is willing to invest wants to have this lawsuit resolved before it gives the green light on significant financing. So we have a bit of a dilemma here. The plaintiff is very unrealistic about their expectation to settle and they won’t be reasonable in a settlement demand. We’ve tried mediation for an early resolution, that has not worked. So, we have a sense that what we’re going to need to do is think outside the box and, tell me in this scenario, which is very realistic for matters I’ve dealt with over the years, where do you come in and how does this work?

Skrzysowski
So, I thank you for that example, and it’s a great one and let me explain why. So, normally, litigation buyout insurance is leveraged from deal teams. Normally these situations arise, similar to your example and this scenario. There’s a deal, there’s an M&A transaction, there’s some other type of financing transaction, and the deal lawyers are doing their due diligence. And during the course of that due diligence, they uncover some kind of known, threatened, or pending litigation, and they’re looking for a way to ringfence all of that risk and cost and basically expunge it away from the business. And they need to do that because a) if they don’t, it could kill the deal, it could cut into the proceeds of the deal, or it could cause the deal to take longer to complete than normal, and it’s not completed under the original timeline. Or you could have the deal lawyers contacting the litigators and they’re putting undue pressure on them to settle at less than favorable terms. So you’ve got the deal team and their timeline and you’ve got this litigation team over here and they’re operating on two totally different operational tempos and putting undue pressure on one another. In that situation, when that business is looking to ringfence all of that litigation risk so they’re not then fighting over how much money to put into an escrow or, again, possibly losing the entire transaction, that’s an ideal situation to leverage litigation buyout insurance, where you’re basically selling that litigation risk to a third-party carrier. So, you can complete the underlying transaction and complete it in accordance with the original timeline.

Schmidt
Kevin, I can imagine in order to enter into the fray in this type of scenario, we ‘ve got $32 million downside, you have to engage in pretty extensive underwriting, for lack of a better word, or maybe that’s the word you use in the industry…

Skrzysowski
It is.

Schmidt
…to assess the risk. Can you tell me about that process?

Skrzysowski
There is a process. Right, so first of all, litigation buyout insurance, or LBOs, can be leveraged for almost any type of litigation across the commercial spectrum. I mean it could be a breach of contract, securities matter, IP litigation, wage and hour, class action. So first of all, when a business comes to us with a piece of litigation, what we would do is we would basically work with you and we would say can you give us a legal memorandum with your SWAT analysis, so that we know your mental thoughts and impressions about this litigation? What are the strengths? What are the weaknesses? Where do you think the off-ramps are? What are your chances of success maybe in dispositive motion, at settlement, at mediation, if it does go to trial, what are the total amount of damages? We’ll take that internally, we’ll round-table it to an investment committee. We’ll make an initial determination if it’s something we think we can underwrite. If it is, we come back to you and we ask for the record, the more complete the better. So we’ll dive in to like the pleadings, the discovery, the expert reports, the damages theories, and then we’ll do a deeper dive, and we’ll do our deep due diligence or, as you said, underwriting, and then again we make a final determination if it’s something we think we can underwrite. Then we come back to you, we work with you and your client and we ask, what are your legal, business and financial objectives? Based on that, and the deep research and diligence we’ve done, we see if we can have a meeting of the minds, and if we can propose policy terms and pricing that satisfy your objectives. If so, then we move on to drafting the policy language, and executing and binding the policy.

Schmidt
So, I imagine that a major part of that underwriting is determining whether the in-house counsel’s 10% of 30 million is accurate or not, and the higher that percentage of a doomsday scenario, the higher the premium’s gonna be. Is that an over-simplification?

Skrzysowski
No, you’re right, and, you know, I sometimes use a cliché like actual mileage will vary, and then the other old cliché is anything’s an insurable, it just depends on what cost, right? So, we’ve worked on cases where the rate on line or the premium as a percentage of the exposure has been 5% and we’ve worked on cases where it’s been 55%. But basically, to answer your question, yes, that is correct.

Schmidt
And then if it is a worst-case scenario you ended up paying it, and you lose on this investment, right?

Skrzysowski
Up to policy limits. You know, every policy has to have a cap. So it’d be up to the negotiated limits, that’s correct, all the way through an adverse judgement against the business. Correct.

Schmidt
At that point, does Certum take over the defense of the litigation, including even changing counsel, things of that nature? Or, do you just let the litigation continue to proceed?

Skrzysowski
Not exactly. Right, so we are consulting experts, we operate mostly just in the background. We are not getting involved in lawyering and litigating, we’re not actually going to court for the client. You maintain that relationship with your counsel. However, if the policy covers 100% of the exposure, like if we’re going to buy, or the carrier’s gonna the whole risk, basically, we do have decision-making at critical stages and with regard to settlement. So, we technically would also have the right to select counsel, however, in all of the situations that we’ve had, most of the businesses are represented by very elite, prestigious, Am Law 100, Am Law 200 law firms, excellent litigation boutiques, it’s their institutional counsel. We’re comfortable with them, the client, of course, if comfortable with them; it’s much easier to maintain that relationship. However, because we now do own all of the risk, some of that decision-making at critical stages is ours to own.

Schmidt
Now, another question I have, really coming from the trenches, thinking about being on the defense side of major litigation along these lines is, to what extent is this arrangement, now that Certum’s involved in has underwritten the litigation risk, disclosed to the plaintiff? And is there a strategic reason to disclose that in order to, sort of, pop the bubble of the perceived leverage that the plaintiff may think they have?

Skrzysowski
That’s a great question. The answer is yes. I mean, many times it is discoverable because you have protection in place and you have a duty to disclose, which is why it’s, you have to be very careful when you’re drafting the terms and conditions and the policy language in case you do need to hand that over.

Schmidt
Is it standard practice for you to participate in mediations or settlement conferences after the policy has been underwritten?

Skrzysowski
Yeah, it could be. You know, sometimes we say, I mean, we’re all living kind of like a post-Covid new normal, right, with regard to being physically present and not, but many times we’ll normally say we’ll have a member of our underwriting team could be available in person for a mediation or settlement conference, or, you know, we’re available by phone to participate in real time, you know? Either or.

Schmidt
Okay. Well, this is a very new and emerging area of defense-side products, and I think that we’re all learning about these new and cutting-edge mechanisms to deal with litigation risk. Let’s now turn to the other side of the V, the plaintiff side. Most of us are much more familiar with litigation finance that focuses on the upside of litigation, not the downside as we’ve been discussing. But for those listeners who are unfamiliar with plaintiffs’ side litigation finance, Will, can you give us an overview of what this industry is? And then we’ll get into some of the unique products that Certum offers.

Marra
Great question, Kent. So I do focus primarily on the plaintiff’s side, and if we orient ourselves to what is happening here, if you have a plaintiff’s side legal claim, you think about that claim as an asset and you can think about it as a contingent asset, right, that has a value, that is a monetizable judgement only if you succeed in litigation. The problem is litigation is extraordinarily expensive. Historically, if you have a plaintiff’s side case, there are two ways to finance the case. First, you can pay your law firm by the hour. The problem is very few companies have the millions of dollars that it takes to litigate a complex commercial case. And even if they have those dollars, they don’t necessarily want to invest them in litigation as opposed to the core business functions of the company. Right, so the first way is you can pay by the hour. Alternatively, you can ask the law firm to litigate the case on what we call a full contingency. The law firm essentially finances the fees and the costs and gets a share of case proceeds if the matter succeeds. Problem with the contingency arrangement is, not that many law firms have the kind of money to invest in their clients’ litigation. So what you’ve had to develop over the past 15 years or so is plaintiff’s side litigation finance, where a third party, like Certum, helps bear the risk that the litigation will not succeed. Most people are probably familiar with the financing side of that, litigation finance where a third party pays the fees and costs. Certum is also unique in that we also have, in addition to litigation finance, we also have insurance products, which are just a different and sometimes more efficient way of transferring out litigation risk.

Schmidt
So what are some of the unique products that Certum offers on the plaintiff side that’s different than traditional litigation finance?

Marra
Yeah, and this is where there are these insurance products on the plaintiff side, which I think folks are probably a little bit less familiar with. So one very good example of that is contingency insurance. This is a situation where a law firm is willing to litigate the case on a contingency, but let’s say they’re going to invest $8 million in two or three cases. At the end of the day, that firm might win the cases and get essentially return on their $8 million investment, or the cases might lose, in which case the firm will be out $8 million. We can provide an insurance policy that would state that in the event that the firm lost those contingency matters, the insurance policy would pay out the amount of fees that they invested in the case. So it’s essentially transferring the risk of a total loss from the law firm to us at Certum. One of the nice things about this is a lot of firms that might wanna help their clients but can’t, because it’s too expensive for them to do so, can now serve those clients. So we view this as product that’s gonna let more law firms offer more contingency arrangements to the clients that need or want them.

Schmidt
Of course, we all know that getting to a judgement is often just the first step in collecting. What happens when there are ensuing appeals, and chasing the defendant and collecting on that? Is that a separate policy? Or is that a part of what is entailed in the contingency insurance?

Marra
Yeah, great question. So the contingency insurance is going to continue to cover the law firm’s risk that it wouldn’t recover on appeal. In addition, however, there are other products that can help. So for example, judgment preservation insurance is something that every litigant and every law firm that gets a judgment should be aware of and should think about. A judgment preservation insurance policy will help ring-fence appellate risk ensure that even in the event that the case gets overturned on appeal, the litigant and the law firm can still get some amount in return paid out by the insurer as opposed to by the defendant. So what you have here is a situation where the law firm can initially get contingency insurance at the outset of litigation. Alternatively, they can initially get litigation finance. And then other products can come online to help further mitigate risks as the case proceeds and hit certain successful milestones.

Schmidt
So it’s interesting, you keep talking about risks and we typically think about risk on the defense side. But you’re talking about the risk of investing in litigation on the plaintiff side and then getting nothing for it, which is something that is also a very significant concern for a lot of companies. Now, the judgment preservation insurance, is that also a product that’s available for the first time when you get to a judgement. In other words, if you haven’t been involved in the case from the outset, with the contingent fee policy, is that something that you would consider if someone’s paid hourly or in some other arrangement all the way through to the judgment and then needs that protection?

Marra
100% yes, correct. So we see judgment preservation insurance opportunities all the time where the claim holder has been paying the law firm on an hourly basis and now that they have a judgment, would prefer to insure. And if you think about why these policies might make sense, there’s really two basic reasons. A lot of it is risk constraint, right? You maybe have the capital, but don’t want to put it at risk to pay your lawyers. Alternatively, it might be that your liquidity constraint, right there are a lot of companies out there that just don’t have the money to pay their lawyers. Litigation is long. You could have a $20 million judgment that you’re pretty sure you’re going to be able to recover on, but it’s going to be 3 years from now to go through that appellate process, right? And in that time you need that money to help run your business, which can get financing or maybe your investors want to make sure that that money’s going to be there at the end of the appellate process. So the same way that a lot of companies look to 3rd party capital for 99% of their business needs except for litigation historically. Now you can look to litigation as well.

Schmidt
So what’s, in general, is the process for having a plaintiff side case reviewed and potentially funded?

Marra
Yeah. So whether it’s going to be on the insurance side or whether we’re going to give you the litigation funding, which is paying the fees and the cost of the litigation, you can think about the process as being structured around three signatures. First is the NDA. You submit your inquiry for funding, we’ll quickly get under an NDA to protect the confidentiality of our communications. At that point, you send along materials for the funder to review. Ideally, there’s a memo that’s summarizing the factual background, the damages, the merits, flexibility concerns, and a funding request. Never forget that right. Have a clear ask for what you’re looking for. At that point, if we like the opportunity, we’ll offer a term sheet which are non-binding terms, financial terms including our return and the amount of our investment. If we agree to that, that would be the second term sheet, the second signature. We then complete our diligence and hopefully close the investment by signing a litigation investment agreement. So the NDA, the term sheet, and the investment agreement are the three signatures.

Schmidt
And is all this due diligence, I suppose on both sides, the downside defendants insurance and the upside litigation investment is all that done internally, if you don’t mind me asking or do you go to outside firms to get a second opinion on some of these things?

Marra
We have a phenomenal team of underwriters that does almost all of the underwriting in house. For certain issues, particularly specialized expertise areas we might go to outside diligence council, either for a more fulsome review or for a check of our work. One benefit here to our diligence process, whether we’re using both internally or externally, is we share all of that with the client, whether we finance the case or not. So it can be hopefully tremendous value add for the claimants and the law firms to get a second set of eyes and that’s what we do all day, right? We spend all of our days figuring out which are the cases that are strongest. And that should go forward and that can be very valuable to claimants who are thinking about whether to bring litigation in the first place.

Schmidt
Very good. Well, it’s an interesting industry. It’s certainly dynamic and changing and it’s fascinating to think about all of these emerging products and ways of tackling the concept of litigation upsides and downsides. We’re almost out of time for this. Podcast. But in what we have left of our time together, I’d like to ask both of you to talk a little bit about your career paths and the place where you’ve ended up, which again is outside the box of sort of the traditional ideas of what lawyers do. I bet both of you, when you were in law school never really envisioned working in the capacity in which you’re working today. But I also get the sense that you have a great deal of passion and you really do enjoy this type of work. So can you give us an idea of the very paths that exist in this market as well as what has taken you through this process to go from beginnings of your career to working at Certum today?

Skrzysowski
So I’d be happy to go first. So that’s a great question. Actually, I have my own podcast, also called Alternative Litigation Strategies, and I used to ask each of my guests at the end what advice would you give to a young person today who wants to start a career in law. So that I would answer my own question by saying I think it’s a great path for one thing. It’s a very deep yet broad based education and it lends itself to just a lot of different opportunities in addition to being a full time practitioner, I actually started off working for a litigation boutique. I mean, I was basically a courthouse lawyer. I was in the building all day, every day. Somehow I moved on to the world of legal information technology development and I worked for some of the largest, most leading companies in that particular area when that was just booming in the late 90s, early 2000s. Did that for a number of years and now I’ve been doing, you know, litigation, insurance and funding for six or seven. So over the past 25 years, I’ve really had like 3 mini careers that have been very different, but all very fascinating. And I think the biggest take away from all of that from just having a career in law is the people, really you work with such a deep bunch of smart, sharp, dynamic, innovative thinkers that are constantly pushing you in your constantly sharing ideas of learning new things. And I think it’s probably been the most rewarding thing over the past two plus decades.

Schmidt
Very good. Well, you’ve had a interesting path from being a Supreme Court clerk to working at Certum today. How has this path been? A lot of surprises and interesting things that have changed your expectations and thoughts concerning the legal career.

Marra
So I would say a couple of pieces pf advice for young lawyers who are just starting out their career. The first is it’s a tremendously interesting time to be a young lawyer. If you think about the purpose of being a lawyer as helping clients, serving clients meet their needs. There are so many ways to do that today. There are a lot of great ways to do that in a law firm or in house. But with the rise of litigation finance with the rise of a lot of these very interesting legal tech companies, I would really encourage people to read widely and understand all of the different opportunities that are out there for lawyers. And second, I would recommend that young lawyers make sure you have a lot of friends who aren’t lawyers. I first learned about litigation finance and a conversation with non-lawyers. Lawyers are great, I love them and we should spend a lot of time with them when we’re lawyers and we do, but there’s a lot to be learned by people in the business world, people in media, people in service industries. They’ll make you better at what you do if you stay in the law, and they will also expose you to new opportunities, new career path. And just talk about my career path briefly. I think that’s exactly right. I learned about litigation finance. Realized that it, for me at least, would be a great way to try to scale my impact in the law and really help clients in a differentiated way. And I feel lucky to have the opportunity to do that here at Certum.

Schmidt
If I could just add to that, I think the other thought that comes from our discussion is as lawyers, I think one of the most important attributes we can have is creativity and problem solving. I think that’s kind of the common theme and everything we’re talking about. Problems on the defense side, problems on the plaintiff side with being able to manage the risk of not getting the return on the investment and what you’re both doing is bringing creative products and services to. Litigation problems at its core, and we. All need to be learning constantly about different ways that the industry is changing, different products and services that are available, and thinking about how to solve litigation problems for our clients. This has been a great discussion. I appreciate you both being a part of this SharkCast podcast and I hope we can connect again sometime in the near future.

Well, that’s all the time we have for today. Thank you for listening. I’m indebted to the extraordinary team at Dorsey for making this podcast an episode possible. For more resources on litigation management, please go to litigationrisk.com where more information can be found, including a book on managing litigation risk written by yours truly. Until next time my friends, this is yet another reminder that there are a lot of sharks swimming out there in the murky waters, so swim safely.

Voiceover
This podcast is not legal advice and does not establish an attorney-client relationship or create any duty of Dorsey & Whitney LLP for those appearing in this podcast to anyone. Although we tried to assure that the content of this podcast is accurate, comprehensive and reflects current legal developments, we do not warrant or guarantee those things. The opinions expressed in this podcast are the opinions of those appearing in the podcast only and not those of Dorsey & Whitney. This is considered attorney advertising under the applicable rules of certain states.