In the world of litigation finance, 2014 could easily be summed up as the year of “it’s too soon to tell” – a phrase uttered by many when considering the impact the Jackson reforms had on third-party funding and after-the-event (ATE) insurance. By contrast, the dawn of 2015 has ushered in the age of ‘the new normal’, as the market has acclimatised and firms have adapted to the new regime.
In adapting to this market, we at TheJudge are witnessing an aggressive drive by many leading law firms to offer a more diverse range of retainer agreements. Firms appear to be appreciating that there is no longer a one-size-fits-all approach to managing a client’s risk, and that adapting to the new market may mean looking more creatively at their client retention options.
There are at least four types of lawyers’ retainers; conditional fee arrangements (CFAs), damagesbased agreements (DBAs), standard fee paying and deferred but insured fees. Each option has a different financial impact, the importance of which should not be overlooked by lawyers. For example, while there are undoubtedly a number of clients who require funding to take their cases forward due to their inability to finance them, a number of cases are now being taken forward by clients who are self-financing their cases but hedging their risk with the use of an adverse costs and own side’s insurance policy. The latter approach is particularly common with larger institutional clients who have the liquidity to finance the case but are unwilling to take on the full risk of a loss or to pay a sizeable success fee to a funder.
Many firms are reporting an increase in clients tendering their litigation, and alternative fee agreements can be an important part of the mix in distinguishing them from their competitors. When pitching for a case there may be a temptation for a firm to advise a client that they have a special relationship with a particular funder or insurer. However, with funders/insurers knocking on the doors of all leading law firms, having one or two contacts is no longer a differential over rival firms. Firms should be cautious of this approach as it can show a lack of independence – how will the firm ensure the best offer for the client? Obtaining a competitive advantage in today’s market requires a sophisticated understanding of all available options and structures. Only then can you show that you have the client’s best interests in mind and help maximise their personal recovery.
Damages-based agreements – are UK firms seizing a lucrative opportunity?
I recently caught up with a highly respected securities litigator contact from New York. During our conversation he made a statement that will resound with the aspirations of many UK litigators handling large value cases;
“We don’t like taking on fee paying work for securities litigation as it means tying up resources where they otherwise would have been applied to a significant contingency case.”
How often would you hear such a statement in a partner meeting at a London firm? Yet the firm in question is highly successful and has made many tens of millions of dollars in contingent fee recoveries. By identifying the market opportunity early they now have a vast war chest, altering their approach to billing forever. Of course, obtaining such a war chest means taking risk and being innovative and aggressive. Fortunately, London-based firmshave a helping hand that was not available to US firms a decade ago – an array of funding and insurance options to help achieve those goals without the spectre of risk that pioneers in plaintiff securities practices in the US had to take. The early signs in 2015 are that UK firms are waking up to theopportunity. We are seeing a steady increase in the volume of enquiries where the firm’s preference is to run the case on a DBA.
The Battle for Market Share in Funding Lower Value Cases
Two years ago it seemed an impossible mission to arrange funding for lower value commercial disputes where the funding required was less than £250,000. At the time all the established funders were engaged in a race to the top, concentrating almost exclusively on big-ticket litigation.
In late 2014 a new market for low-value case funding emerged. Some new funders are spreading their investments over 50 cases or more rather than relying on making a return across just a handful. A higher volume of smaller deals ought to perform more predictably than a lower volume of larger deals. However, funding in this sector of litigation is tricky. High-value case funding models do not work for low-value cases because the funder needs to collect a sizeable return on their successes to pay for the inevitable losses of a volatile portfolio. Not only do funders need to cover large losses, they also need to meet tough target returns to their investors. All too often there is insuffi cient margin for the case to be economically viable for a high-value funder.
If a case is pleaded at £1m and the funding requirement is £100,000, on a traditional funding model it simply will not work. If the £1m pleaded sum realistically means a £600,000 settlement and a funder charges a multiple of three or four times its investment, by the time irrecoverable costs are charged the client is unlikely to see much of the proceeds. It’s obvious from this exercise that lower value cases require a more economic solution.
One way new funders have managed to get their pricing materially lower than traditional funders is by relying on insurance to absorb their investment risk. If the funder can recover their losses from insurance, the funder’s risk is limited to their success fee and how long their capital will be deployed for. With such materially lower risk it becomes feasible to charge a reduced funding fee.
Of course, such funding models need to absorb or add the cost of an insurance premium to the success fee charged to the counterparty if the case wins. However, because the cost of insurance is relatively modest by comparison to funders’ success fees, the aggregate cost is still cheaper in most instances than traditional funding.
Distinguishing Between Providers
The funders in this market operate different models, and only time will tell who has got the balance right. However, there are two key distinctions between these providers worth addressing that affect not only the stability of the market, but also the likelihood of the client obtaining terms. Distinction one is that some funders require a commitment from the law firm to bring them a portfolio of cases, whereas others will be happy to fund one-offs. History has shown that in commercial litigation generally, lawyers want to access standalone funding for their clients from the open market as and when they need it, without restriction.
Distinction two is that some funds rely on a single insurer to underwrite their capital (and possibly also provide adverse costs cover), whereas others allow the client to choose their own insurers. This may seem like a subtle difference, but the implications can be signifi cant. With an exclusive insurer model the funder is largely at the mercy of that sole nsurer’s appetite. Therefore funder, law firm and client are reliant on that insurer maintaining a goodquote rate and high service standards.
A single insurer model works well where the world is in harmony; that is to say both the insurer and the funder agree on the merits and economics, and the book performs as expected. But assessing cases is a subjective process and every insurer will inevitably decline a high proportion of the cases they see. The key is that not all underwriters think the same way and not all assessors will decline the same cases. Allowing the client to elect their own insurer means the client can search the market of multiple insurers, not only to get a competitive price but also maximise their chances of getting an offer.
Burford Capital recently launched their low-cost funding product, Sprint. They recognised that if the driver for low-value case funding is both volume and insurance, relying on the appetite of just one insurer could be destabilising. By having multiple insurers underpinning the model, Burford mitigates the risk of any one insurer either acting as a bottleneck or withdrawing from the facility following poor underwriting results, which should result in more certainty for the future of the product and a greater number of cases being funded.
Most insurers who have lost money in the ATE market have not done so due to a poor win-rate. Instead, it is often erroneous pricing that leads to their downfall. If the price is too low and insurers do not earn suffi cient premium to cover their losses this typically will not show until all the cases in the book have concluded. Conversely, if an insurer’s price is too high they won’t write any business.
Sprint is a possible glimpse into the future of low-cost funding. It has a fixed ratecard that provides a clear pricing structure before solicitors apply for the funding. Likewise, having defined eligibility criteria means lawyers can work out for themselves whether their clients will qualify for the funding. But, most importantly, Burford commits to cases through Sprint quickly thanks to the insurance component.
Regardless of the models underpinning these new low-cost funding products, it is clearly a positive that all parts of the litigation spectrum are now being targeted by funds. We appear to be inching closer to the Civil Justice Council’s recommendation to the Government, back in 2007, that third-party funding should be an “acceptable option for mainstream litigation”.
If you have a case you think would benefit from any of the products mentioned in this article, please contact our office where you can speak to James or another memeber of our specialist broking team: