Litigation funding and insurance for defendants

While most funding and insurance products have been designed with the claimant in mind, there are solutions that can be applied to defence situations. As with claimant cases, it is important to consider whether the aim is to relieve the cash flow burden of paying the legal fees in defending the claim, or whether the key objective is to ringfence the business’ liability to a fixed sum for budgeting purposes or to appease shareholder concerns about the potential of a catastrophic loss.

It can be challenging to structure a solution for defence matters that gives certainty and cost savings to the defendant without creating a moral hazard for the insurer or funder behind them. That is to say that one must avoid creating a personal incentive that exposes the insurer or funder to a situation where the defendant either doesn’t care what happens or is better off if the insurer or funder loses money. It is certainly easier if there can be said to be a binary win/loss outcome or if there is a damages figure that can be used as a “line in the sand” to distinguish between what is considered to be a “success” for the defendant and what is not.

Litigation funding for defendants

In reality, funding solutions for defence cases only makes commercial sense where the funder can be paid from some monetisation event arising from the success. Such situations include:

An agreement to give the funder a stake in a future asset or income flowing from the successful defence. For example, the defence of a patent infringement case might give rise to equity value in the success of the defendant business, or someone defending the ownership of an illiquid asset could agree to sell the asset after confirming ownership upon success.
Where the defendant has a counterclaim that is larger than the claim they are defending. The logic being that the funder’s success fee can be taken from the damages awarded in the counterclaim (probably after netting off any amounts to pay the claimant, if any, under the claim).
Where the business has a portfolio of litigation matters supported by the same funders. This enables the funder to offset any unrecovered legal costs or adverse costs incurred when unsuccessfully defending a claim against the success fees recovered in other cases where the same business is making recoveries as the claimant.

Where a funder is willing to invest in a defendant matter, the structure of the arrangement is likely to be similar to that which would apply to a claimant case.

Litigation insurance for defendants

Own fee insurance can be tailored to reimburse the business for an agreed percentage of legal fees and disbursements if the case is deemed to be unsuccessful, in accordance with the agreed definition of “success”. Insurance is also available to indemnify the business against an adverse costs order.

But the difficulty always lies in defining success. In a defence scenario, this will usually be measured by the amount of damages, if any, that are payable to the claimant in comparison to the full value of the claim. The premium for litigation insurance for defence matters can be payable by the insured defendant on an upfront basis at the inception of the policy, or it can be partially or fully deferred until the conclusion of the case. The premium may be funded by a funder or linked to a monetisation event as set out in the scenarios mentioned above. If a deferred premium is in place, it is often only payable in the event of a success, howsoever defined. It is usually expressed as a percentage of the amount insured, which can be staged to allow for discounts to the premium to account for varying degrees of “success”.

For those businesses looking to transfer more than their fee risk in defending a claim, insurance may be available to indemnify them in respect of their combined exposure to legal fees and damages in excess of an agreed amount and up to a fixed limit of indemnity. Thus, enabling a business to ring fence their liability for budgeting purposes or to appease shareholders.

CFA insurance for law firms acting in defence matters

In addition to being available to the defendant directly, insurance can also be structured to sit behind a law firm’s conditional fee agreement (CFA) to soften the blow felt by the law firm, in the event that their definition of success in their CFA is not met. The arrangement is between the insurer and the firm and so it doesn’t affect the client beyond facilitating the law firm’s ability to offer the CFA in the first place.

For example, let’s assume the law firm offers their client a 50% partial/discounted CFA and then insures 50% of their risk (that is, 25% of the full fee estimate) for a contingent premium, leaving the law firm at risk for 25% of their fees. If the defence succeeds, the law firm recovers their fees and their success fee from the client and pays the insurer’s premium. If the defence fails, the law firm recovers 50% of their fees at risk (25% of their full fees) from the insurer in addition to the 50% payable by the client under the partial CFA, thus enabling them to recover 75% of their fees in total. The insurance, therefore, enables the law firm to reduce their risk and increase their fee realisation in the event of a loss in return for a share of their success fee, without it impacting upon the amount the client pays.

Whilst the litigation funding and insurance products on the market are not primarily aimed at businesses defending a claim, a number of providers are willing to see just how far they can go to develop a product that is economically sustainable for them whilst meeting the needs of defendants. It’s clear that the insurance market has the advantage given the nature of their product; it remains to be seen just how may defendant cases the funders will take on.

In any event, defendants looking for cash flow assitance or to manage their risk in respect of legal fees incurred in defending a claim should anticipate that they will need to retain some risk themselves in alignment with a funder or insurer. The litigation insurance market can be particularly creative if the law firm involved is willing to share risk with them. As for litigation funding, the claimant market is a more natural fit, and it may be some time before defendants can access a suite of options in the way claimants can.

This article first appeared on the Practical Law Dispute Resolution blog on the 20th September 2018. Please click here to be directed to the article on the PLC site.