How Does Class Action Insurance Work?

UWWM Founder and Principal John J. Upchurch recently was interviewed by Lawyer Monthly Magazine (link here), and he was asked about current trends and likely innovations for mediators. Some examples came from the class action practice area. (Click here to see Part 1 of this excerpt, "What's New and Promising in Class-Action Mediation?")

Florida mediator John J. Upchurch John J. Upchurch

In cases where a defendant is concerned about the financial impact of a settlement, accounting implications, or the risk going forward , we recommend engaging a specialty risk consulting firm to assist in providing a quantitative and qualitative analysis of the settlement risk, and to help structure a settlement underwritten by insurance. Most importantly, this provides a mechanism to achieve a full risk transfer of the liability through the use of a specialty insurance product. Often, a claims-made settlement structure, acceptable to class counsel and the court, is negotiated. The insurance company issues the appropriate policy with limits adequate to fund it at a substantially lower total cost than a common fund. The settling defendant company is released, and the insurance company steps in as the responsible financial party to fund the settlement payout.

What are the advantages from the defendant company’s point of view?

If a company can achieve a settlement that provides finality and certainty at a substantially lower total cost, that is a win. That is what this technique achieves with the use of leveraged dollars backed by insurance coverage; eliminating volatility and uncertainty. The premium is relatively small, as it reflects a low “take rate” by class members, based on historical comparables. The defendant company can essentially close its file. The premium is tax deductible, and other than reporting the expense, it is relieved of the need to carry the potential liability of the settlement as a GAAP liability on its financial statements.

And from the vantage point of the claimants?

The case is settled, avoiding the risk and uncertainty of an unfavorable outcome. There is an accelerated payout of the settlement funds, as well as attorney’s fees and costs. With settlement insurance and full risk transfer, companies are no longer concerned about making the settlement at the low margin, thereby risking approval or reversal on appeal. Instead, these settlements tend to be bigger, better and more likely to be achieve finality. A failed mediation is replaced by a comprehensive settlement with a clear pathway to final, nonappealable judgment. Financial security is assured as coverage is backed by a major global insurance company.

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