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Digital EditionRising Star Stephen Kyriacou Discusses the Growing Potential of Litigation Risk Insurance
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Here’s our conversation with Stephen Kyriacou, managing director and senior lawyer in Aon’s litigation risk group, and a 2023 At Large Power Broker winner.
Risk & Insurance: How did you come to work in litigation risk insurance? Can you summarize your legal background?
Stephen Kyriacou: I spent the first decade of my legal career as a trial and appellate lawyer in the New York City office of Boies Schiller Flexner.
It was the perfect place to come of age as a young litigator — we staffed leanly and the partners gave associates a massive amount of responsibility; we followed a “generalist” ethos, which meant that I learned to become an expert in whatever subject matter or practice area my cases involved.
But there came a point where I burnt out on “Big Law” — the hours, the travel, the never-ending succession of battles against opposing counsel. I interviewed for a few in-house opportunities and explored a move into litigation funding.
Then I got a call from a headhunter who asked what I knew about “litigation insurance,” and the fact that I had never heard of it before piqued my interest.
R&I: How do you determine if a risk is insurable? What would make a risk uninsurable?
SK: Insurability in the litigation and contingent risk insurance market always comes down to the same guiding question: “Is it highly unlikely that the final outcome of this litigation will result in a loss under the contemplated coverage structure?”
First, our team at Aon makes sure that we understand our client’s motivation for seeking coverage. We use our experience as former practicing litigators to work with their outside counsel to understand the risk profile of their case, and we do our own deep dive into the factual and procedural history of the case and the relevant case law.
If Aon believes, after doing all that work, that it is highly unlikely that our contemplated insurance structure would result in a loss to insurers, we submit the risk to them, and then it’s their turn to get comfortable with the risk through their own diligence.
R&I: What are the top 3 benefits of contingent and litigation risk insurance?
SK: I’ll give you one top benefit for each of our three core insurance solutions.
For judgment preservation insurance [JPI]: monetization.
When a judgment doesn’t have collection risk, taking out a JPI policy can allow a judgment holder to obtain a loan backed by the combination of the judgment and the policy, permitting them to cost-effectively pull forward judgment proceeds while an appeal remains pending — a process that we refer to as insurance-backed judgment monetization.
For adverse judgment insurance [AJI]: a downside cap.
If a private equity firm wants to buy a company, but the target is being sued for $500 million, an AJI policy might provide $400 million in defense-side coverage kicking in above a $100 million deductible. That coverage can enable an acquisition to close with a $100 million escrow holdback or indemnity that tracks the deductible (because that’s the financial risk that the buyer will face), rather than a $500 million holdback or indemnity that could make the transaction cost-prohibitive for the seller.
And for litigation funder portfolio insurance: bringing in new investors.
Many litigation finance firms invest on behalf of institutional investors. Some of these investors adhere to guidelines that prohibit investing in anything other than so-called “investment-grade assets,” which litigation finance is not.
That means that billions of dollars of potential capital that could otherwise be invested in the litigation finance space can’t be deployed. But if we wrap a litigation finance fund with principal protection insurance, the fund may be opened to low-risk institutional investors.
R&I: Looking forward, where do you see opportunities for innovative new solutions in this space?
SK: Much like the litigation funding community has gravitated towards portfolio investments, I expect to see insurance companies become more open to insuring cross-collateralized portfolios of litigation-related risks.
The challenge there is that many insurance companies still cannot insure the litigation finance companies and plaintiff-side litigation firms who would be the main buyers of this sort of coverage.
We will need to continue to work to show insurers why they should be not only willing but actually excited to insure these sorts of risks.
With their high premiums, the long tails on the underlying litigations, and the fact that some of the brightest legal and financial minds in the world are picking these cases as likely winners, litigation finance and plaintiff-side litigation represent some of the best bets that insurance companies could possibly make. &
