In May 2022, a judge at the U.S. District Court in Texas ruled that IBM had breached a 2015 licensing agreement signed with a competitor, BMC Software Inc., awarding BMC more than $1.6 billion in damages. IBM subsequently appealed the ruling. In April 2024, a federal appeals court in New Orleans overturned the judgment. Although BMC lost the appeal, there was a silver lining: A group of insurance carriers led by Liberty Mutual had insured the possibility of an appeals court reversal.
Executive Summary
"There's this pattern in the insurance industry where someone comes up with a new product generating big demand, everyone jumps in to grab market share, a ton of policies are sold, and three years later it's a smoldering crater because no one fine-tuned the actuarial."The words of an unidentified speaker familiar with the Judgment Preservation Insurance market sum up the story of how a unique but very risky litigation insurance policy ran into trouble, following a particularly gulping loss after a period of irrational exuberance. A course correction may be needed for the niche market to stabilize, brokers told journalist Russ Banham.
According to Bloomberg Law, BMC’s insurance coverage provides between $500 million and $750 million, with Liberty Mutual picking up the tab for at least $100 million and possibly $150 million. (“Liberty, Insurers Take Hit on $1.6 Billion IBM Judgment Policy” by Emily R. Siegel, May 8, 2024, Bloomberg Law) The insurance policy providing the consolation prize is called judgment preservation insurance, or JPI. JPI covers the possibility that an award granted at the trial court level could be reversed or reduced on appeal. The bespoke product guarantees the policyholder an agreed-upon financial amount, a figure typically in the tens to hundreds of millions of dollars—enough money in many cases to buffer the financial impact of so-called “nuclear verdicts.”
The number of JPI policies sold is unknown, as the dealings between the buyer, broker and insurance companies are private and there are no regulations requiring disclosure. Approximately 30-40 individual insurers, some under the cover of an MGA (managing general agency) or an MGU (managing general underwriter), share in the risk of a sizable JPI loss via an insurance tower of coverage, said Joseph Menning, senior vice president at insurance broker HUB International, who specializes in lawyers, accountants and contingent liability risks. “The JPI market is big, given the possibility of [absorbing] a nine-figure loss, which tells you how much insurance capacity is out there for the right risks,” Menning said.
