Litigation Funding and Its Implications for US and UK Insurers

Author:Mr Matthew Ferguson, Sean R. Simpson, Andrew Milne, Ed Smerdon, Tristan Hall and Michael A. Sabino
Profession:Sedgwick LLP
 
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Litigation funding is growing rapidly with the emergence of new funds and wealthy individuals willing to back cases in an ever-expanding number of jurisdictions, including in the US and the UK. It is enabling claims to be brought by private individuals and small to medium sized companies with limited resources. It is being used by large, publicly listed companies as a source of working capital for claims, a tool for managing their legal spending, and a means of moving the costs off their balance sheets.

The involvement of funders is having an impact on insurers' approach to cases backed by them and the tactics used in defending such claims.

In this article we provide an overview as to how litigation funding operates, consider its global use, and discuss the specific implications for US insurers and UK insurers.

OVERVIEW

What is litigation funding?

Litigation funding is the financing of claims by third parties such as investment funds and wealthy individuals. Until recently, it was almost always provided by law firms running cases on a contingency basis whereby their fees were only payable if the cases succeeded.

Contingency-based agreements are popular in the US, particularly in consumer class actions such as product liability claims brought against pharmaceutical companies. Conditional fee agreements have fallen out of favor in the UK since 2013, when reforms were introduced which prevented plaintiffs from recovering their lawyers' success fees from defendants. Whilst damages-based agreements, whereby a plaintiff's lawyer takes a cut of any damages recovered, were introduced in the UK as an alternative, their take-up has been limited as there are restrictions on their use which make them less attractive for lawyers.

Who are litigation funders and what are they funding?

Litigation funders are usually investment funds that pay a plaintiff's costs of bringing a claim in return for a share of the proceeds. Most professional funders like to incentivize lawyers through modified forms of contingency-based agreements which include provisions for uplifted hourly rates if cases are successful.

Many of the largest funds are based in the US, including Burford Capital, which recently acquired another fund, Gerchen Keller, for $175M. There are large funds in the UK, such as Calunius, which has just completed a £100M fund­raising round. Australia, which was at the forefront of litiga­tion funding, is the home of Sydney-based IMF Bentham, which recently launched a £200M vehicle to fund US cases.

There are some wealthy individuals who back cases on an ad hoc basis often for personal reasons. In those cases, they often have little interest in the amounts recovered.

The co-founder of PayPal and early Facebook investor, Peter Thiel, backed Hulk Hogan's case against Gawker regarding its publication of salacious videotapes. The former president of Formula One, Max Mosley, supported a number of phone hacking cases brought against UK newspapers that illegally obtained unauthorized access to voicemails left on celebrities' mobile phones.

Private citizens are using crowdfunding platforms to help fund cases in the US and the UK. In the US, charitable and political organizations often create crowdfunding events to facilitate the support of litigation addressing political and social issues, such as voting rights or immigration. These crowdfunded litigations differ from other types of litigation funding in that they do not seek a return on investment.

Jill Stein, the Green Party nominee for US president in the 2016 election, quickly raised over $4.5M through crowd­funding for recount challenges in several battleground states. The successful challenge to the UK government's decision to trigger Article 50, which starts the UK's formal exit process from the EU, without a parliamentary vote was supported by £170,000 in crowdfunding.

Some startup companies in the US are facilitating crowd­funding litigation as a form of investment, including Lexshares, Trial Funder and Invest4Justice. Invest4Justice has received pledges exceeding $3.2M since it was founded in early 2014.

How does litigation funding work?

Litigation funds pay a plaintiff's legal costs on a non-recourse basis in return for a fee payable from the amounts recov­ered. This fee can be a percentage of the damages received, a multiple of the funding provided or a hybrid of the two.

In the UK case of Norscot v. Essar [2016], which was backed by a UK fund, Woodsford, the litigation funding fee was the higher of 300 percent of the funding provided (£647,000), or 35 percent of the damages recovered. The amount ultimately paid to Woodsford was £1.94M.

There is typically a litigation funding agreement in place between the funds and the plaintiffs detailing the terms on which finance is provided, and the grounds on which it can be withdrawn. Additionally in the US, the funder will often require the plaintiff to enter into a non-disclosure agreement in an effort to protect the terms of the funding agreement from the defendant and potentially the court.

Withdrawal is usually only permitted where there is a significant change in the prospects of a claim succeeding, and the enforcement of any judgment obtained. In the UK, this occurred in Harcus Sinclair v. Buttonwood [2013] where the funder was permitted to terminate the funding agreement having reasonably formed the view that the chances of the claim succeeding had fallen below 60 percent.

Funding is provided to private individuals, small to medium-sized companies with limited resources and also large publicly listed companies. They use it as a source of working capital for claims, a means of moving the costs off their balance sheets and a tool for managing their legal spending.

Funding is not always in place from the start of a case. Funders often come in at a later stage, once the merits are clearer or assistance is required.

In the UK, plaintiffs sometimes seek assistance where they are required by the courts to provide security for a defendant's costs if their claim is unsuccessful. In the US bankruptcy courts, trustees have utilized litigation funders to support ongoing efforts to recover monies, and thereby increase the size of the estate available to repay creditors.

How do litigation funders assess claims?

Professional funders take a cautious approach in deciding whether to finance claims as they only make a return...

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