One distinctive feature of the litigation funding space over recent years has been the emergence and increased availability of insurance products that protect investors from potential financial risks when providing capital to bring cases to court.
In England and Wales, if a claimant loses, they will generally be liable to pay the legal expenses of the defendant – and this responsibility also extends to those who fund the case. But insurance is now widely available for third parties who fund litigation – and as it becomes more widely adopted, costs are predicted to drop even further.
“The growth of insurance products for the litigation funding space can be a real game changer, impacting not only the cost of capital, but expanding the universe of investors able to add this sector to their portfolios.”
Boris Ziser, Partner and Co-Head of Finance and Derivatives at Schulte Roth and Zabel
At VWM Capital, we believe that these new insurance products massively enhance the proposition for funders by protecting their liability in the event that a case is lost – as well as helping those seeking redress do so without fear of having to pay the legal fees of their opponents in court. This is why all our funded claims have after-the-event (ATE) insurance in place.
Below we explain in more detail how ATE insurance works, but for now let’s note it means that the capital you invest will not leave you exposed to having to pay adverse legal costs – such as the defendant’s legal fees, disbursements and expenses.
The legal situation for funders in England and Wales
“The increased availability of insurance has enhanced the options available […] when it comes to protecting the downside of litigation.”
Civil litigation cases in England and Wales are subject to a ‘loser pays’ rule as stipulated in Part 44 of the Civil Procedure Rules (CPR). This means that the losing party in a litigation has to pay the legal costs of the successful party.
Litigation funders can be directly affected by this stipulation as they are subject to what is known as the Arkin risk. Based on case law arising from a decision in the Court of Appeal – and subsequently extended in cases such as Excalibur Ventures and Chapelgate – litigation funders of a case can be held liable for the opponent’s costs.
But the ability to insure against this is increasingly available at attractive premiums for funders.
Legal insurance products for litigation funding
“The emergence of legal insurance products allows … [you to] … ring fence potentially deleterious outcomes and provide for certainty where uncertainty used to be the rule.”
There is an expanding portfolio of insurance products available for funders – including many bespoke options based on assessments of contingent risk. These include:
After-the-event (ATE) insurance
ATE insurance policies protect litigants and funders against the opposing side’s costs and expenses, should the claim fail to win. These policies typically cover legal fees and disbursements.
The insurance is purchased after the event that prompts the claim, but before the legal proceeding starts. Indeed, the closer the proceedings are, the more expensive ATE insurance typically becomes.
Sometimes payment of the insurance premium can be deferred or is contingent on the success of the case, but such arrangements will increase the expense of the policy. It is also possible to arrange a staged premium that increases with the various stages of litigation.
ATE insurance protects against an adverse cost award and as such – although applicable in England and Wales – it is not generally offered in the United States, where a cost-shifting regime is not widely used.
Before-the-event (BTE) insurance
BTE insurance is sometimes referred to as legal expense insurance. It offers to cover potential legal costs before a dispute has arisen and is often encountered in claims related to personal injury or contract disputes.
Judgment preservation insurance (JPI)
JPI protects a claim or a group of claims that have already received judgments. It is designed to ensure that the claimant receives exactly what the judgment decrees, with the insurer covering any shortfall. It is often used to mitigate risk introduced by delays that appeal processes can entail.
Portfolio insurance
Portfolio insurance offers a comprehensive solution that covers the many different litigation cases within a portfolio. This allows funders, law firms, and corporations to spread their risk across a range of cases. While reducing exposure for each case, it also enables higher cost predictability, which means litigation risks can be managed more effectively and strategically.
Insurance and litigation funding: reduced risk and increased access to justice
We recently discussed the effects of the growing role that insurance plays in litigation funding with the co-founder of Ignite, a leading provider of customised litigation risk transfer strategies.
The full conversation with Jamie Molloy can be found here, but of particular interest is his view that policies such as Ignite’s Capital Protection Insurance will greatly empower individuals to seek redress from deep-pocketed corporate defendants.
“There are going to be a number of significant developments in the litigation funding sector in the next five years [such as] the increase of litigation funding in both the small-to-medium size case sector and also in the mass consumer litigation sector.”
Jamie Molloy, Head of ATE and Co-Founder of Ignite Specialty Risk
At VWM Capital, we use innovative lawtech, expert litigation knowledge, and the safeguard of ATE insurance to make litigation financing available to a high number of claimants in a range of case types and sizes. This means we can fund cases with a social impact and, at the same time, offer risk-diversified investment opportunities to investors.
Litigation insurance contributes to the democratisation of the legal system and opens the doors to those looking for uncorrelated, alternative investment opportunities. It ensures that even if the claim is unsuccessful, claimants and funders are protected.
To find out more about our approach to litigation funding, read more of our insights or speak to our team.