Leo Dixon, Global Head of Energy Claims at Zurich, posed this question at the Clyde & Co Energy Forum on 20 May 2015. He explained that litigation risk is “The forecasted percentage chance of success / failure of running the claim through the courts of the jurisdiction stated in the policy. This percentage chance is then calculated as an amount of monies which are added to the adjusted claim value in order to increase the amount being offered to the customer to both avoid litigation and close the matter fully and finally.”

Litigation risk is most often paid where there is a difference in expectations of how the policy responds, whether because of errors in the placement of the risk i.e. assets are not correctly declared, the breadth of cover provided in response to the incident is disputed and / or policy liability issues arise i.e. whether any exclusions apply to the incident or not It will most often be a factor for high value claims which means the claim has a high profile in both the Insureds and Insurers organisations.  Unpredictable law and jurisdiction can create a much higher degree of uncertainty, which makes the payment of litigation risk a more attractive and practical solution.

Leo explained that one way to help reduce the payment of litigation risk is to focus on the customer relationship, in order to build trust and help reduce the difference in expectations. The percentage of consumers with "complete trust" in the insurance industry was estimated in a 2014 EY Global Insurance Survey at just 53% in the UK, compared with 70% globally. This is lower even than the figure estimated for banks. Leo put forward four methods of dealing with this:

  1. Underwriters to involve claims colleagues earlier in the process. If claims handlers are present at the tendering, negotiation and renewal stages, relationships can be built from the very earliest opportunity, and then developed in a positive way before a claim is made.
  2. Claims handlers to deliver good news as well as bad. Customers' personal associations with the individual can impact very strongly on how a claim is settled. By providing good news claims handlers are seen in a fairer and more balanced light.
  3. Pre-loss scenario workshops. Customers and brokers are able to help insurers understand their Business Continuity Plans and general priorities, which allows for a more individual approach to cover and promotes an agreed intent. Loss notification processes can be explained fully using individual, hypothetical scenarios in order to help avoid issues arising later.
  4. Project-managed approach to large and complex claims. This transparent process allows insurers to demonstrate their expertise from the outset and continue to build trust throughout the relationship.

Leo concluded that by developing these systems litigation risk need not be a necessary evil. Insurers can initiate steps to create a positive, working and trusting relationship early on in the process, which will lead to fewer issues arising between the parties when a claim is made. If both sides are on the same page and are coming from a positive starting point, whilst litigation risk may not be avoided completely, it can certainly be reduced.