Insurance is an essential ingredient

Insurance is an essential ingredient as the global expansion of litigation funding continues

The Abu-Dhabi Global Markets (ADGM) Courts have published a set of Litigation Funding Rules 2019 making them the first authority to issue such rules in the Middles East and Africa region. This announcement is another milestone in the global development of third party litigation and arbitration funding following the well-publicised reforms made in Hong Kong¹ and Singapore² as well as recognition of the legitimacy of funding by the DIFC³.

This is welcome news for the litigation funders and brokers who all receive enquiries from clients and law firms throughout these regions as well as others based further afield who adopt such arbitral centres as a matter of preference. Anything that expands the reach, legitimacy and relevance of litigation funding will be greeted with approval by the funding market.

However, welcome as any new rules or guidelines are, it is debatable whether the issuing of rules and guidelines can act as a catalyst for the introduction of funding in the absence of what we would argue is a fundamental building block essential to any new funding markets where cost-shifting applies. Namely, adverse costs insurance (or ATE insurance).

Wherever third party funding appears or wherever litigation funders are encouraged to spread to, if there is a risk that the funded party or, perhaps more importantly, the funder themselves might incur adverse costs, ATE insurance becomes integral to a jurisdiction’s attractiveness. Any new territory for funders, legitimised by local authorities, will be no more than a hollow expansion if funders are not prepared to commit serious and regular investments without adverse costs protection.

No doubt a handful of deals can be engineered by funders willing to tie up capital offering an adverse costs indemnity alongside a funding arrangement (if it is legally permissible to do so) but such deals require substantial commitments, credibly doubling or tripling the overall exposure, and do not amount to a very efficient use of their capital generally. Some cases may be so lucrative that it is worth allocating cash to an adverse costs reserve in this way, but the funding market cannot be a significant driver for access to justice across a reasonably wide spectrum of meritorious cases without insurers willing to assume risk locally or from outside the territory.

We are working hard to build a market for ATE insurance in commercial litigation and arbitration in the USA, Canada and other territories. We are making good progress. It is our expectation that ATE insurance will grow in these newer centres for funding.

To expect funding in the UAE, Hong Kong or any other geography with cost-shifting to quickly expand into a mainstream option for claimants who may need it, is to mis-understand the reliance litigation funding has on the insurance market in order to thrive. The evidence suggests that reliance is about to intensify with the continuing degradation of the Arkin cap which hitherto protected funders in England & Wales to a degree for adverse costs.

The rise of third party funding has helped ATE insurance survive in the UK following the major legislative changes imposed on the market by LASPO 2012 so the reliance is not one-way. The removal of the Arkin protection will further cement the symbiotic relationship between litigation funding and insurance.

Whilst rule-makers can promote certainty and legitimacy to aid the growth of funding, adverse costs insurance is an essential ingredient for any litigation funding market to thrive and for the rules to be more than just theoretical.

¹ The Hong Kong International Arbitration Centre (HKIAC) approved the 2018 HKIAC Administered Arbitration Rules which included rules on third party funding. This followed the abolition of champerty through amendments made to the Hong Kong Arbitration Ordinance in 2017, paving the way for arbitration funding in Hong Kong for the first time.

² Singapore Institute of Arbitrators (SIArb) and SIAC both produced guidelines on third party funding following legislative reforms brought in by The Civil Law Act and the Civil Law (Third-Party Funding) Regulations 2017 permitting litigation funding in international arbitration cases.

³ DIFC Courts released Practice Direction No. 2 of 2017 acknowledges the legitimacy of funding.