Utilising own fee insurance to reduce the client’s outlay

Producing a budget that is realistic and won’t scare off a prospective client during a pitch can be a challenge.

Lawyers might be tempted to be overly optimistic in preparing the cost estimate, but this can be a cause of frustration to the client, particularly if, half way through the case, the budget materially increases. Corporate clients, in particular, will often seek chunky discounts on the firm’s charge out rate, yet at the same time be concerned by perceived “bait and switch” tactics or other means that they fear the law firm might deploy to help achieve its target realisation.

Litigation finance is often the first option considered by clients with a reasonably sized claim who are not able or willing to pay their lawyer’s the firm’s standard hourly rate. Yet many corporates remain reluctant to have a third party exercise any control over their case or their decision-making process. In addition, a typical funder’s success fee may be considered simply too steep to justify (outside of a portfolio structure) for a company with a good balance sheet, especially where they are advised they have a strong case.

Some law firms are willing and able to offer alternative fee arrangements such, as Damages Based Agreements (DBAs), which enable them to share the risk of the case losing in return for an uplift but even where a law firm is willing to offer this, some clients fear (rightly or wrongly) that this can give rise to a conflict of interest for the law firm and so prefer not to go down this route.

A mutual tension can, therefore, exist between the law firm and the client. Ever increasing discounts are unlikely to be sustainable in the longer term for many leading practices, particularly if they are being outbid by rival firms or new boutiques.

If alternative fees with uplifts, such as CFAs or contingency fees (DBAs) are not an option, there are other solutions that might meet the needs of both parties.

Partial deferred fee arrangements backed by own fees insurance.

Under this model the law firm sets its proposed budget using its standard charge out rates. Rather than agreeing what can often be a sizable discount with the client, the law firm agrees to defer a percentage of their fees, often 50%, until the conclusion of the case. The deferred fees remain payable by the client whether the case wins or loses, however, the client can then potentially obtain own fees insurance to cover the deferred portion of the fees.

Through this arrangement the client has reduced their cash outlay by 50% yet the law firm has received their standard charge out rate, without discounts and without any question of the law firm’s advice being compromised by any perceived notion of conflict arising from the firm sharing the upside value.

If the case loses the insurer will respond to pay the deferred fees up to the agreed limit. However, if the case wins, the client will likely be in receipt of a cost and damages recovery which will, hopefully, be enough to pay the outstanding legal fees. It’s worth noting that insurers will typically cover the risk of a paper judgment. If there is a shortfall between the legal costs outlay and the sums recovered, an indemnity would apply and the insurer will step in to pay the shortfall, thereby ensuring the law firm has recovered its full fees.

Of course, the insurer will be charging the client a premium for covering the deferred fees. However, in most instances, the premium will only be payable if the client’s case is successful (i.e. the premium is “contingent upon success”). So, if the case were to lose, the client’s fee outlay is capped at 50% of the costs incurred. In such circumstances, the insurer will pay a claim for the deferred fees but does not collect a premium.

So, while such an arrangement results in the client paying an uplift (the insurer’s premium) in addition to their fees in a win scenario, the uplift is not going to the law firm and, crucially, is likely to cost significantly less than the success fees often charged by litigation funders, enabling the client to retain the majority of their recovery.

Our track record at TheJudge shows that 70% our corporate clients seek to insure their fees rather than obtain third party funding or engage their lawyer on a contingency basis once advised of all the options available to them.

Of course, the above is a somewhat simplistic example and there is scope for the client and the law firm to negotiate a variety of alternative pricing mechanisms with or without the assistance of litigation funding and own fees insurance. If the market continues to become more price sensitive, firms that are largely reliant on their traditional billing model will need to think more creatively about their pricing arrangements. Risk transfer advice to clients will start to feature heavily for firms who simply cannot degrade their rates any further to win business.

It is important to stress that this is not a hypothetical concept. Lawyers with a sound understanding of available market options are already taking advantage of these arrangements and are leveraging them when pitching to win new work or retain key clients.

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