Sharing or offsetting the financial risks associated with litigation is not new. For over a decade, it has been possible for an individual pursuing a personal injury claim to purchase an insurance policy which covers the costs associated with losing or abandoning their claim. Today, litigation insurance (aka 'After the Event' or 'ATE' insurance) is being used by many pharmaceutical companies, as a means of minimising the cost risks associated with litigation, as well as improving their tactical or negotiating position.
The idea behind litigation insurance is simple if the case fails, the insurance policy will pay a certain amount of the policyholder's liability for legal costs. Anyone that has been involved in litigation in this jurisdiction will be painfully aware of the fact that the losing party is generally ordered to pay the legal costs of the victorious party, as well as being stuck with its own legal costs. Indeed, it's the potential cost exposure that is often cited as the reason for companies deciding to capitulate at an early stage, or not to proceed with litigation at all.
The starting point for ATE insurance is therefore to remove the risk of having to pay the opponent's legal costs in the event of a loss, as well as covering some of the policyholder's own legal costs. What is really interesting about the insurance is that the premium is not paid until the end of the case, and is not paid at all if the case fails. The insurer is, in effect, gambling on the outcome of the litigation. If the case wins, the insurer collects a premium and does not pay out (the legal costs being recoverable from the opponent). If the case loses, the insurer does not collect a premium and pays the costs.
Things look even better when you consider that litigation insurance premiums are a recoverable cost in the litigation, in the same way as the legal costs. So, if the policyholder wins and recovers its costs, the opponent must pay the insurance premium on top of the legal costs and any remedy (ie, the damages or injunction, etc).
TOO GOOD TO BE TRUE?
This may all sound too good to be true and one might wonder how the insurers ever make any money. The answer is that insurers will not insure every case, but will only offer insurance if they believe that there is a good chance of success. Therefore, across a book of insurance policies, the insurer will expect to win more cases than it will lose, so that the premiums collected on the successful cases will both cover the payments made on the lost cases and generate a profit.
So what has changed and why is it only now that we are hearing about litigation insurance being used in pharma patent disputes? At the heart of the evolution is the willingness and desire of the leading markets to insure these cases. Patent litigation was historically seen by insurers to be risky and unpredictable, particularly in the pharmaceutical sector. In reality, this probably had less to do with the actual risks of patent litigation and more to do with the underwriters' lack of expertise in knowing how to assess and price these cases. Today, however, the market is much more sophisticated; with many of the leading insurers using independent expert counsel to risk assess the cases referred to them.
Of course, patent disputes are often much more complex than other areas, particularly where there are multiple patents, multiple infringing products or a range of potential outcomes which might be influenced as much by commercial realities as by points of law. As a result, the case outcome will not always fall neatly into concepts of 'win' and 'lose.' Whilst this makes structuring the insurance slightly more involved (a standard, 'off the shelf' policy is unlikely to be suitable), the increased sophistication of insurers' underwriting and able brokers means that policies can be made to work around very complicated cases.
Ultimately, the uptake on these insurance products has been dictated by the approach of the lawyers involved. Many patent lawyers who are on pace with insurance market developments have woken up to the benefits of enabling their corporate clients to hedge their litigation cost risk. With capacity available in the market to insure up to £10m+ of legal costs for any one case, clearly such insurance ought to be a consideration for all cases, regardless of size.
The very existence of an insurance policy also tactically assists the insured by demonstrating to the opponent that a major A Rated insurance market has independently endorsed the insured’s view that their case is strong, as well as showing that the insured has the stomach for a fight and will not be deterred by the costs risks.
James Blick is a senior commercial broker at TheJudge Ltd.