POST-JACKSON: THE LAWYER’S DILEMMA WHEN ADVISING CLIENTS ON FUNDING OPTIONS
Now the dust is settling, with recoverability of ATE insurance premiums and CFA success fees soon to be a distant memory, the question many litigators are asking is “What’s Next?!”.
The short answer, unfortunately, is that there is a more complex web of options to understand, coupled with a greater focus on the economics of litigation at an early stage. Litigators will be bombarded over the weeks and months to come with different funders and insurers each suggesting they have the “best solution”, whether it is a portfolio funding facility through to a “one-stop shop” for funding and insurance. The truth is that it’s unlikely that either end of the spectrum is the right answer, at least in the short-term.
The funding and insurance market is a very fluid place at present. Both markets are rushing to provide product tweaks in order to try and acheive a competitive advantage. A number of the players in the market, particularly within the litigation insurance market, have done very well from a high volume of deal completions for small and medium sized disputes. However, with recoverability removed, it’s the smaller value cases which will suffer the most, which is not good news for small business claimants or indeed the insurance market previously supporting those cases.
It’s simply no longer viable, in many cases, for an insurer to underwrite £200,000 of costs for a case with a maximum claim value of £200,000, whereas it might have been during the recoverability era. As a consequence, there is likely to be a large amount of insurance capacity now seeking a new home.
Turning to the litigation funding market, at today’s headcount there are more funders in the market than ever before. However, even with this increasing pool of capital, the volume of litigation funding deals completed is still relatively modest. Some funders, for example, have struggled to deploy their funds in UK cases as the margins in many cases have been too tight. Furthermore, this dilemma over finding cases with suitable margins occurred during a period of recoverable ATE insurance premiums and CFA success fees.
Most funders will insist upon security in the form of a litigation insurance or ATE insurance policy to at least cover the potential adverse costs exposure in a case. With recoverability now removed, this tightens the margins further still, since previously it was only the funder’s fees which would be taken from damages, not the ATE insurance premium or the lawyer’s success fee.
I should caveat this point by saying I’m mainly addressing the medium sized disputes; for very large cases, recoverability has always been something of a ‘red herring’ in any event, since the nature of such cases means settlements are normally concluded on a global costs-inclusive basis and therefore take account of litigation insurance premiums and CFA success fees, in addition to the litigation funder’s fees.
So pulling the pieces together, there is unutilised capital, both in the litigation funding and insurance markets and a smaller pool of viable cases being chased by an ever growing group of funders and insurers. In short, the market is swinging towards the client’s favour.
Litigation funders and insurers will be increasinly inventive over the pricing and structure of their deals, over the coming year, as they rush to grab market share. While there are important considerations when selecting a litigation funding partner, such as reputations and financial standing, ultimately it ought not to be forgotten that the client’s primary motive is to secure the most competitive litigation funding offer. With such a fluid market, the only way to be confident the price is right is through market forces.
While portfolio litigation funding is potentially a good solution in a mature market and where law firms have the volume of cases to warrant it, in the present climate many law firms still have a question mark over how many conditional fee or damages based agreements they might entertain. Locking in prematurely to one source of capital (whether via litigation funding or insurance) might not necessarily be a prudent option. However, should such an arrangement appear to be the right solution, at the very least it ought to be subject to a well-planned tendering exercise and one where the firm is proactive in proposing and negotiating any potential structure.
Ultimately, all law firms are seeking the competitive edge and that edge is rarely delivered from an ‘off-the-shelf’ solution.
The other sense of caution is of course not to forget the ultimate consumer, i.e. the client itself. A litigation funder or insurer may be promoting their preferred solution, and likewise the law firm may have its own aspirations in respect of its returns from suggested models, but ultimately anything put together has to work for the client otherwise all the assumptions applied in the structure go out of the window.
Accordingly, understanding what competitor law firms will be doing to attract business is a crucial part of evaluating a law firm’s future approach to engaging with the litigation funding and insurance market.