Upfront Premiums v Contingent Premiums – finding the right mix.
Litigation insurance is typically priced in two ways: (1) upfront premiums paid at or soon after inception (non‑refundable), and (2) contingent premiums paid only on a successful outcome, often from proceeds.
“Cheaper” headline rates for upfront premiums can sometime prove misleading once you account for effective cover, cash flow, and financing costs.
1) What the labels don’t tell you: Upfront payments act like a quasi‑deductible because they are non‑refundable. On a £1m policy with a 15% upfront (£150k), a full claim nets £850k (£1m minus £150k). With a contingent premium, the insured pays only on success, preserving the full cover until outcome and avoiding any sunk cost if the matter fails or a claim needs to be made on a policy.
2) The financing effect (the hidden driver): If the insured cannot self‑fund the upfront, external capital is usually priced with a return. Funding a £150k upfront at a 2 - 3× multiple provided by typical litigation funding arrangements makes the true cost £300k - £450k. That can erase the apparent discount of an upfront rate versus a contingent rate charged only on success.
3) A simple rule of thumb: If you must finance the upfront, compare the contingent rate to the financed upfront cost, not just the upfront rate.
4) Practical considerations:
· Cash flow & optics: Contingent aligns cash out with success inflows; easier for boards and auditors to support than prepaying non‑refundable amounts.
· Cover integrity: Upfront premiums erode effective cover from day one; contingent preserves it.
· Duration risk: The longer the case, the more punitive financed upfront potentially becomes relative to contingent.
5) Hybrid structures that often work:
· Small upfront + majority contingent (self‑fund the small portion to avoid financing drag where possible).
· Staged/stepped contingent rates at clear risk milestones (e.g., post‑disclosure, pre‑trial).
· Caps or collars on total contingent outlay to create cost certainty on success.
6) Quick checklist:
· Can you self‑fund the upfront without external capital? If no, weigh contingent more heavily.
· What is the expected duration? Longer = stronger tilt to contingent.
· Is preserving cash/cover and simplifying governance important? If yes, lean contingent or hybrid.
Of course, the insurance market itself may dictate the options available. Not all insurers will quote on the same cases, and where they do, there can be significant variation in approach—particularly in relation to contingent premiums. Testing the market via a broker is therefore good practice to maximise the options available for consideration and negotiation.
Takeaway. Upfront rates can look cheaper, but once you factor in non‑refundability and financing, a contingent structure - or a hybrid that is majority contingent – may well prove the most cost‑effective and governance‑friendly choice for litigation insurance.
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