Transforming Legal Risk
Litigation has often been seen as a purely legal issue, a matter for lawyers and the courts to resolve. But for businesses, disputes are just as much a financial concern as they are a legal one. A major case can tie up capital, distort balance sheets, and impact market confidence. Increasingly, the market is recognizing that legal risk should be treated like any other financial exposure - one that can be measured, managed, and, crucially, transferred.
This is not a marginal concern. In the UK, the proportion of businesses managing disputes in England and Wales rose from 62% in 2023 to 76% in 2024 (according to the Shoosmiths Litigation Risk 2025 report). Across the pond, organisations with revenue over $1 billion spent an average of $4.3 million last year on litigation - up from $3.9 million the year before (reported by the Norton Rose Fulbright 2025 Annual Litigation Trends Survey).
Across firms, risk management typically involves quantifying exposures and reducing volatility. Credit risk, market risk, and operational risk, are all assessed through financial models and accounted for in decision making. Legal risk is no different: the outcome of a dispute can often be analysed in terms of probability-weighted returns, potential downside losses, and opportunity costs.
Yet while financial institutions have long had sophisticated tools to manage other forms of risk, litigation risk has historically been harder to address. Outcomes depend not just on numbers but on the behaviour of judges, witnesses, experts and counsel. This unpredictability has often led companies to treat litigation as a binary event. That perception is changing.
This change has several drivers, with two in particular highlighted here: advances in AI tools and LLMs, and the growing role of insurance.
On AI, specialist analytics providers now offer data-driven insights into case outcomes and judicial leanings, giving funders, insurers, and corporations better tools to quantify risk and develop strategy.
Greater adoption of these tools should allow for more efficient risk pricing and risk transfer markets, reduced costs, and greater alignment between parties due to the reduction of unknown quantities.
That being said, the element of the unknown within litigation will never truly be eliminated, but greater use of AI-driven insights should help to support the framing and packaging of litigation in a financial sense, encouraging risk transfer that works for all stakeholders.
In the right hands, these tools can help insurers and funders identify the most commercially viable opportunities, filter those outside of risk appetite, and gain a clearer view of portfolio-wide aggregations. This points towards leaner underwriting teams that spend more time on the risks that matter.
The perception shift is not only driven by AI and analytics. Insurance is playing a transformative role. Adverse Costs (ATE) and Contingent Risk products provide mechanisms to shift litigation risk off the company’s balance sheet and into a more manageable form. The growing use of insurance shows that legal risk is being managed more like any other balance sheet liability.
ATE insurance ensures that if a claim is unsuccessful, the claimant is not left bearing the other side’s costs, allowing parties to pursue meritorious cases without jeopardising financial stability. For funders, it further allows for efficient deployment of capital when otherwise security for costs would have to be provided.
Contingent risk insurance enables corporates to manage uncertain or unresolved legal exposures such as pending appeals or disputed liabilities by converting open-ended risks into fixed, predictable costs.
By transferring these risks, businesses are not eliminating litigation altogether but are converting uncertainty into certainty. In financial terms, turning a volatile liability into a quantifiable expense.
Treating legal risk as a financial asset creates tangible benefits across the litigation ecosystem:
Corporations can smooth earnings, protect balance sheets, and release the capital that might otherwise be tied up in unresolved disputes. For example, looking through an M&A lens, a company facing litigation that could block a transaction could convert the liability into a fixed cost through a contingent risk policy.
Law firms can provide clients with more strategic options, particularly in high-value, high-risk cases, enhancing their client service offering.
Litigation funders and investors gain improved risk-adjusted returns, with insurance acting as a safeguard against adverse outcomes.
In each case, the ability to quantify and transfer legal risk allows stakeholders to make more rational, financially informed decisions about disputes.
Legal risk is no longer just a legal problem, it is a financial one. As disputes become more complex and the sums at stake grow, businesses cannot afford to treat litigation as an unpredictable hazard sitting outside normal financial planning.
Most corporate legal risk today remains effectively self-insured. While not every dispute is insurable, the scope for insurers to transform the understanding and transfer of legal risk is still substantial. Combined with the rise of AI-driven insights, litigation can be turned from an unpredictable hazard into a quantifiable, tradable financial asset, unlocking value for companies, law firms, investors, and insurers alike.
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Ben Studdert
Analyst
Toremis Specialty