This blog follows a series of recent publications by TheJudge aimed directly at GCs and financial controllers (see example articles: GC Magazine –“Managing risk when engaging external counsel” May 17 & Economia, “Litigation to Boom in 2017”)
Let’s face it 12 years ago, the litigation market was a very different place. Firms were often engaged on their reputation alone and such firms did not feel the need to pro-actively resort to alternative billing arrangements to attract blue chip clients. Flash forward to today and it’s a vastly different place. Several previous mainstays top 50 law firm brands no longer exist, a number of new entrants offering non-conflicted dispute resolution services have emerged and are now knocking closely on the doors of some of the largest PEP earning firms. Corporate litigants have grown battle weary to uncapped litigation budgets and face increased budget limitations and greater pressures to obtain “value” driven retainers from external counsel.
What then should lawyers be advising their corporate clients when it comes to better managing their cost exposures? We briefly discuss below some of the key highlights all lawyers should be including in their client discussions, irrespective of the retainer being proposed to the client.
Monetisation and portfolio finance for large enterprise companies
The media disclosure last year concerning a small portfolio of cases funded for BT shone a light on how corporate attitudes are changing in terms of how GCs and financial controllers manage their legal spend.
Portfolio finance arrangements for corporate enterprises are now as much about monetisation of a portion of the asset value (the prospective damages value for the cases concerned) as they are about financing the legal fees. If a corporate client wants to monetize part of its case portfolio (e.g. to be able to use the capital elsewhere in the business) then there are a host of creatives ways in which this can be done and with a range of financiers ready to aggressively compete.
Cross collateralization between cases can substantially lower the overall cost of funding, and potentially allows for cases to be financed that might not otherwise have attracted a funder on a one-off basis. However, if a portfolio finance model isn’t the prime goal, then for most blue-chip entities, litigation finance for one-off matters is likely to have less appeal, particularly if the GC is in an informed position over their other hedging options.
Risk not cash – The GC challenge
Achieving budget certainty and avoiding economic shocks from unsuccessful litigation is a universal concern for all companies in today’s market, regardless of their financial standing.
Few corporate clients will have liquidity issues that necessitate the need for external financing for their legal spend (albeit there will be exceptions) but risk exposure is still a key concern for many. Budget overruns and the general fatigue GCs feel towards them can also seriously client / law firm relationship.
The credible solution
There is a potential fix to this problem and one that doesn’t require the law firm to engage in a race to the bottom in terms of fee discounts to win new instructions, or require the law firm to enter large risk bearing retainers. Indeed, a solution that does not require months of due diligence time with litigation finance companies. “Litigation Fees Insurance” enables corporate clients to insure the legal fees and expenses they pay their external counsel. If the case is lost the insurer reimburses the fees and expenses incurred. This is not to be confused with adverse cost insurance, which is an entirely separate coverage designed to insure the cost shifting risk in an unsuccessful case.
Cover can be arranged at the outset of the case but also in circumstances where the case is at an advanced stage. To address the “budget overrun fatigue” issue, insurers can even retrospectively insure the fees and expenses already incurred.
Policy limits are available from a low as £200,000 of legal cost cover up to and exceeding £30m. Like funders, insurers will consider the full spectrum of commercial disputes, ranging from contract disputes, patent litigation, competition, construction through to large international arbitration cases.
If, as we suspect, the vast majority of your new case engagements are still privately funded, then not only is it a necessity in terms of Solicitors Code of Conduct to discuss the potential availability of such insurance in order to put the client in an informed position, but from a business development perspective, it would also be a major missed opportunity for the law firm not to do so.
At TheJudge we’re increasingly being engaged directly by corporate counsel who have felt compelled to research the risk transfer market directly. In several examples, the firm extended our engagement to also provide independent support to introduce suitable external counsel to tender for their case or cases (where no firm was currently instructed). This is a marked change from years gone by, where referrals were almost exclusively law firm led.
What our blue chip and large enterprise clients have say:
Everything cited above is not based on theory but has been proven in practice time and time again. The following are just a few comments from corporate clients of TheJudge, who notwithstanding the availability of litigation finance, elected to self-finance and ultimately insure their fee exposures:
“Air Canada has its share of significant litigation matters that entail a high expenditure on fees and disbursements. While we have the ability to self-fund, in some circumstances we might prefer to hedge the economic risk of a negative outcome. In these situations, we find litigation insurance to be a very cost effective way of hedging our risk.”
– Air Canada
“Being able to insure our legal cost exposure gives us significant comfort. The Judge are knowledgeable and responsive. They delivered a cost-effective solution and guided us throughout the process”.
– KGAL Investment Management (a $25bn investment company)
And what about law firms who have experienced litigation fee insurance in practice for their corporate clients:
“The idea that corporate clients can now insure the fees and expenses they pay their attorneys, and in so doing share the risk with international insurers, is likely to be of real appeal to many GCs. The fact that in many instances the insurers only charge a premium if the case is successful makes the proposition even more compelling.”
– Jones Day
“Being able to retrospectively insure the fees incurred gives in-house counsel extra flexibility and peace of mind in what could otherwise be an increasingly stressful financial commitment.“
– Dechert LLP
Embrace the business development opportunity and avoid the risks of failing to advise
In today’s climate, it’s imperative that all fee-paying clients who will be a claimant in legal proceedings are informed about their potential funding options, which includes being advised on their ability to insure the legal fees and expenses they pay the law firm. In so doing, it’s necessary for all fee earners to be aware that the premium for this coverage is usually less than a third of the cost of third party finance, and is often available on a contingent upon success basis (meaning the insurer only receives a premium if the case succeeds).
Failing to advise could mean a tender is lost to a rival firm who has so advised (there are many firms who apply this advice routinely) or worst still the firm could face challenges if there is a negative outcome in the case and the client’s capital outlay is consequently written off. Such an outlay may have been avoidable had the client been insured.
Need further convincing? Consider this, many of Europe’s litigation funds have some form of litigation insurance behind the scenes. The funds themselves are taking advantage of the fact that insurance is a cost-effective hedge on their capital exposure. So, some of these funds are insuring themselves, yet offering funding where they require many multiple returns on their investments.
All fee-paying clients can capitalise on this cost-effective form of risk management. In fact, even law firms themselves can directly capitalise if they want to keep the available a share of the damages recovered in-house at the firm, rather than being passed to the funders (see articles in relation to the launch of Contingency Fee Insurance in the US and DBA Insurance in the UK).
Pitching for a case? Let us help give a preliminary indication of the client’s likely options
If you’re in discussions over a potential new engagement and would like to be able to give the client an overview of all their likely options, then we’re happy to help. With some very basic details we can give you an indication of the client’s likely options without needing to embark on a full application at this point: contact us here.
Bespoke training on site, with practical and relevant case studies to match your team’s practice area:
Does your team need an updated training session on the full market options, including contingency fee insurance, litigation finance, litigation fee insurance, portfolio & monetisation solutions and above all how to mix and match or integrate these options into your client pitch? Contact us