Litigation Risk Insurance: an emerging component of corporate risk management

Litigation Risk Insurance (LRI) seeks to address the inherent uncertainties that come with legal proceedings. Regardless of how compelling a party’s case may appear, there is always a possibility of an unfavourable outcome. LRI allows parties to a legal dispute to mitigate (some of) these risks by transferring litigation-related cost risks to an insurer. Originating in Anglo-American legal systems, this form of insurance continues to make its way into continental European markets. This article provides an insight into the various types of LRI now available, the opportunities they present for managing litigation risks, and the specific challenges associated with underwriting such policies.

Key types of LRI

As litigation becomes increasingly complex and financially significant across the European Union, litigation risk insurance is emerging as a key component of corporate legal and risk management strategies. The rise in collective actions, regulatory enforcement, and third-party litigation funding has elevated the importance of proactive legal risk mitigation.

The European market now offers a range of litigation risk insurance products beyond traditional legal expenses coverage. These include the most common types of LRI: Adverse Judgement Insurance for hedging the defensive party’s risk, Judgement Preservation Insurance for covering risks imposed to the claimant and After the Event Insurance to cover legal costs of either party.

Adverse Judgement Insurance

Adverse Judgment Insurance (AJI) is designed to cover the financial risk associated with a defendant losing a legal dispute. It typically applies to pending or foreseeable litigation and is triggered only after a final, non-appealable judgment is rendered. The policy includes a deductible, which caps the insured’s exposure at a predefined amount, thereby transferring the remaining risk to the insurer.

This structure makes AJI particularly relevant in M&A transactions, where identified litigation risks – such as ongoing disputes or regulatory investigations – could otherwise deter potential buyers or complicate valuation. By ring-fencing the liability, AJI helps facilitate deal execution and provides certainty around worst-case outcomes. In this respect, AJI serves a similar function to the well-established Warranty & Indemnity (W&I) insurance, which has become a standard tool in European dealmaking over the past decade.

Beyond M&A, AJI offers strategic benefits in broader corporate contexts. For example, escrow arrangements can be limited to the deductible amount, reducing the impact on liquidity and freeing up capital for operational or strategic use. This can be particularly advantageous in transactions where sellers seek a clean exit or where buyers require certainty to proceed.

AJI is most suitable for high-value disputes with strong legal and factual defenses, and underwriting is rigorous, often involving detailed legal analysis and risk profiling.

Judgement Preservation Insurance

Judgment Preservation Insurance (JPI) is designed to protect claimants who have secured a favorable judgment in court proceedings. It provides coverage in the event that a higher court reverses or reduces the awarded amount during the appeal process. Subject to a deductible, the policy ensures that the claimant retains (at least) a minimum portion of the original award, even if the judgment is partially or fully overturned.

This type of insurance is particularly valuable in high-stakes litigation, where appellate risk can significantly impact financial planning and strategic decision-making. By mitigating the uncertainty of appeal outcomes, JPI allows claimants to treat judgments as financial assets with more predictable value.

Beyond securing the awarded amount, JPI offers strategic advantages in settlement negotiations. Knowing that a portion of the judgment is insured can strengthen the claimant’s position, reduce pressure to settle prematurely, and potentially lead to more favorable terms. It also helps unlock liquidity and stabilize financial reporting, especially for corporate plaintiffs facing long appellate timelines.

After the Event Insurance

After-the-Event (ATE) insurance is currently the most widely used form of LRI in continental Europe. It is typically purchased after a legal dispute has arisen and provides financial protection against the costs associated with pursuing or defending a claim. Specifically, ATE policies cover:

• Adverse cost orders (i.e., the insured party being required to pay the opponent’s legal costs if the case is lost).
• Own legal disbursements, such as court fees, expert reports, and counsel fees.

ATE insurance is particularly relevant in jurisdictions with “loser pays” rules and is commonly used in personal injury, commercial litigation, and clinical negligence cases. It is available to both claimants and, in some cases, defendants, depending on the insurer and jurisdiction.

Because AJI and JPI generally do not include coverage for legal costs, ATE insurance can be effectively combined with these products to provide more comprehensive protection. This layered approach allows parties to manage both the costs of litigation and the financial consequences of its outcome, enhancing strategic flexibility and financial certainty.

In addition, there are other, even less known and used types of LRI, one example being judgement collection and enforcement insurance (covering the costs associated with collecting and enforcing a judgment, including legal fees and enforcement costs).

Challenges for insurers

1. Litigation inherently involves uncertainty, and even strong cases can result in unexpected outcomes, making it challenging to assess the chances of winning a case. This is especially true for the high-value disputes which are typically the subject of LRI and regularly feature a particularly high degree of complexity (and, in the event of default, may represent a significant concentration risk for the insurer due to the high amounts involved). This could be reinforced in future by the increasing use of litigation funding, which may enable more higher-risk and high-value cases to be brought to court.
    
2. The underwriting process for litigation risk insurance – especially JPI – is rigorous and highly specialized. Insurers must conduct a detailed assessment of all relevant aspects of the dispute to evaluate the likelihood of an appellate reversal or reduction in the awarded amount. In the case of JPI, this typically involves a thorough review of the first-instance judgment, with particular attention to the legal reasoning and factual findings. Underwriters must also consider potential arguments from the opposing party and assess their strength in the appellate context. This includes evaluating jurisdictional nuances, procedural posture, and precedent that may influence the outcome. Given the complexity and legal expertise required, the assistance by external dispute resolution counsels can help ensure that the risk is accurately quantified and that the policy structure reflects the specific dynamics of the case.
   
   This level of diligence is essential to maintaining underwriting integrity and ensuring that the insurance product delivers reliable protection in high-stakes litigation scenarios.
    
3. The challenges outlined above highlight that the insurer’s risk exposure varies significantly depending on the type of LRI and the stage of the dispute being insured. Generally, risks associated with JPI are more straightforward to assess than those under AJI, as a first-instance ruling has already been issued in the former. This provides a concrete basis for evaluating appellate risk.In contrast, AJI often involves disputes that are still in early stages or have yet to be fully developed. At this point, key information – such as the strength of legal arguments, evidentiary issues, and procedural developments – may still be evolving. Even within AJI, the underwriting complexity can vary: ongoing proceedings with established facts and legal positions are typically easier to assess than newly initiated claims.Insurers account for these differences when designing their coverage programmes, tailoring policy structures to reflect their risk appetite and the maturity of the dispute.
   
   However, it is important to note that thorough underwriting is essential across all LRI types. Each product requires a detailed legal and factual analysis to ensure that the insured risk is properly understood and priced.
    
4. Currently, LRI is most commonly structured on a stand-alone basis, meaning that coverage is arranged for a specific, individual legal dispute. This approach allows for tailored underwriting and policy terms that reflect the unique characteristics and risks of the case in question. However, LRI can also be structured on a portfolio basis, where multiple independent disputes are bundled into a single insurance programme. This model enables companies – particularly large corporates with recurring or parallel litigation exposure – to consolidate risk across several matters. Portfolio-based LRI offers broader coverage and can lead to cost efficiencies, including reduced premiums through risk diversification and economies of scale in underwriting.
   
   This approach is especially beneficial for organizations with multiple ongoing or anticipated disputes, such as financial institutions, manufacturers, or multinational corporations. It supports more strategic litigation management and can enhance financial predictability across a broader litigation landscape.

Conclusion

LRI presents an opportunity for insurers to expand their product portfolios and respond to the growing demand for sophisticated legal risk management solutions. By offering coverage across a range of litigation scenarios – from adverse judgments to appellate risks – insurers can support clients in navigating complex disputes with greater financial certainty and strategic confidence.

For further information on underwriting and claims expertise with regard to Litigation Risk Insurance, please feel free to contact us.