IPOs from Silicon Valley are worrisome these days, says the WALL STREET JOURNAL. (October 9th, 2014 at A1). Now suppose cyber insurance could be created for the perils in situations like this. Obviously, the stock selling well below the price tentatively predicted (with heavy qualifications, of course) by the financial company and perhaps the law firm. There can be huge, even ruinous loss. It could wreck the company.  The Facebook case was not that bad, but it was startling.  Zynga was even worse.

Insurers could analyze the probabilities of initial pricing independently.  They could issue insurance as the usual layered way to protect from losses, the primary using a substantial SIR.

In addition, the insurers could demand specified safety precautions. This would be good for the market.  The insurer could demand contracts from the financial entities and the law firms to it. These would be very difficult lawsuits to win, but complex IPO demand very special, advanced, highly specialized work.  E & O cases can be won in that domain.

Now for the most interesting problem.  Usually, only clients can sue their lawyers for negligence performance, and that is a tort, not a breach of contract. In fact, most states refuse to let clients use breach of contract as a device for recovery.

So why not create a new set of relationships? The law firm contracts with a non-client to perform services of a specified type at a pre-agreed level of performance for its client, the “IPOing biz.,  and if that requirement is not met, there is a breach of the contract between the law firm and the insurance contract.  No subrogation is needed; no assignment is involved.

The IPO-ing biz will have consented to this arrangement, though it need not be a party to the contract. 

Of course, none of the 3 entities (or three divisions of entities) could object to or attack the arrangement.  This waiver, or something like it, “a rule-out,” would be especially important with the law firm that entered into the contract.  After all, it is a sophisticated entity, so much so that injury to public policy in the arrangement is an unlikely judicial finding.

And even the big law firms need this kind of business so they will do it voluntarily. They will be able to get malpractice insurance for the project on a case-by-case business. They can live with the huge SIRs that is a certainty, and they will protect themselves from the enormous losses which they will be facing in the relatively near future.

All underwriting on matters of this sort will be difficult and highly speculative, but so is all underwriting of the new.