How litigation insurance can reduce write offs

The biggest complaint that lawyers make about the third party funding market is the difficulty they experience in securing an acceptable offer for their client, specifically how that translates into wasted fee earner time and, more often than not, client money. The latter creates embarrassment (which many perceive as worse) but for the firm, the wasted time is painful to absorb. The same concerns prevent many firms from signing off on CFAs or DBA opportunities. If cases supported by risk bearing retainers lose then the fee earner time invested in the hope for a contingent reward is wasted. Whilst the risk to the law firm is the same, when acting under a CFA or DBA, the upside shifts from the funder to the lawyer. Yet firms seem to persevere with funding with much greater fortitude than risk bearing retainers.

For me, repeatedly spending days trying to secure external finance simply to ensure the client can pay a proportion of the base fees is a risk to a law firm’s finances that is not measured properly against the risk taken to secure a potential upside through instruments like contingency fees.

If one is to spend 30 hours trying to secure funding on a case in the hope that it will generate fees to no avail, or incur 30 hours on a contingency or conditional fee basis on a case that discontinues, what’s the difference? There is no difference, of course, but it seems to be that many law firms approach their client’s funding needs in this way.

There is, however, a way to create a delta between these two situations using DBA of CFA insurance, also known as “WIP Insurance”.

If a lawyer wastes 30 hours chasing down funding on a case that they believe in to satisfy internal cash flow targets without getting it off the ground then there is a complete loss of that time. If the same lawyer makes the decision to back the same case with 30 hours of his fee earning time on a contingent basis supported by WIP insurance and the case loses, a claim can be made under the policy for the amount insured, likely to be 50% of their fees. In this scenario, only 15 hours will need to be written off and the firm will have achieved a 50% realisation rate.

Not to mention, the other important positives:

Had the case won, there would have been a substantial uplift for the firm even after payment of the deferred and contingent premium for the firm’s downside protection. It is important to note that the DBA Insurers share the risk with the lawyer and are only paid by the law firm if the case is successful and the firm makes a sufficient recovery to cover their agreed fees and afford the premium.
A client, presumably, is far happier with a law firm that backs their case with their own time, whether it goes on to win or not, compared to the lawyer who spent 30 hours chasing a funding offer to pay the fees upfront only to get nowhere with the application. For corporates this difference must have a bearing on future instructions.
The speed at which a lawyer can get internal sign-off for a CFA or DBA should be much faster than an application for external finance. The personality and risk appetite of the firm will have a major bearing on whether such a billing arrangement is possible at all but this must be a truism compared to funding because many funding offers are predicated on the existence of an approved CFA.

The existence of a competitive and increasingly populated funding market will drive improvements in the markets decision making and service standards but if a lawyer has a case in which they can gain internal approval to run on a CFA or DBA, a decision from the outset to pursue WIP insurance instead might be a ‘game changer’ for that fee earner if not the firm.