Until such time that there is a legislative change in Ireland to amend the application of the torts and offences of maintenance and champerty to legitimate third party funding arrangements, there appear to be no method in Ireland by which to allow a third party to invest in the outcome in a piece of litigation without leaving the arrangement voidable on the basis that it an abuse of process. Fortunately, commercial litigators in Ireland can still benefit from the other mainstream risk transfer market, namely the litigation insurance market.
Despite the common perception that litigation insurance (otherwise known as ATE insurance) is only available to indemnity defendant’s costs if the plaintiff loses the action, there is a growing trend of clients and law firms using litigation insurance as an alternative to litigation funding.
Example 1: Work in Progress (WIP) Insurance for Law Firms
In the event of an impecunious or illiquid client, solicitors are able to take on plaintiff actions on a ‘no win, no fee’ basis with the law firm, or the client, paying the outlays in advance of trial. But taking into the account the considerable contingent income being carried and/or the outlays required to advance the case; how many of these types of arrangements can a law firm allow themselves to become exposed to?
Using litigation insurance to hedge their position, potentially allows firms to take on more alternatives fees engagements, since they have a guaranteed fee realisation whether the case wins or loses.
This is achieved by a law firm offering a ‘no win, no fee’ arrangement and then purchasing an insurance policy to indemnity the law firm, as opposed to the client, for a pre-agreed percentage of their normal fees, and 100% of any outlays, in the event that the case is unsuccessful.
The premium for this cover is paid by the law firm if and when a successful outcome has been achieved and, as such, in the event of an unsuccessful outcome, is a costs-free hedge for the law firm’s contingent income.
Example 2: Own fees Insurance for self-funding clients
Aside from impecunious clients, the other most common driver for clients seeking traditional litigation funding is to enable a client to take a hedge on their own legal spend. Where funding is not permitted, or where the clients that can afford to pay but wants the legal spend ‘off-balance sheet’, litigation insurance is a viable and cost-effective solution.
In this scenario, the client themselves would obtain a litigation insurance policy to indemnify their own legal spend. In the event that the case is unsuccessful, the client is reimbursed for the fees and expenses they have paid their lawyers. Again, the premium for this insurance cover is often only paid if and when the case succeeds. Furthermore, success would normally be defined as the recovery of damages and not simply achieving a judgment or award. The Court of Appeal has already considered the concept of ATE insurance and have distinguished it from litigation funding, finding that it does not offend issues of champerty and maintenance.
Whilst the Legal Services Regulation Act 2015 may not go as far as obliging solicitors to inform their clients of the existence of litigation insurance, and the extent to which it can indemnify a client against their liability for one or more of parties to the litigation, it is certainly arguable that a failure to do so could results in future problems for the firm. For example, the firm could be left with a very disgruntled client and a reputational issue should the case lose and the client later find out that they could have insured a portion of their outlay.
Regardless of professional obligations, advising clients of the litigation insurance alternative to funding may well prove to be the key that unlocks good cases that the client would not have otherwise pursued due to concerns about the ability to finance the legal costs.
Director of Broking
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