An alternative to the traditional UK litigation funding model - Bank-funded litigation financing, backed by insurance
There has been exponential growth in the level of third-party funding provided for claims brought in the English courts over the past decade.
Funding has been sought on the one hand by single (commonly institutional) entities, and on the other, by groups of claimants sometimes numbering hundreds or thousands of individuals and/or institutions. Claims have been pursued in connection with share and debt securities mis-selling, financial derivatives disputes, and other broader categories of contract and tort disputes, as well as large scale breaches of competition law.
Many of the established third-party litigation funders operating in the UK market are members of the Association of Litigation Funders - https://associationoflitigationfunders.com
A fairly standard model of funding runs along the following lines.
Traditional third-party litigation funding model
Typically, third-party litigation funders in the UK operate on a 1:10 (or broadly similar) budget-to-claim amount ratio, meaning that for every £1 million of litigation funding provided there needs to be at least £10 million of realistically realisable damages. If a potential claim satisfies that ratio, the claimant will wish to understand how much the funder would be entitled to take from any proceeds of the successful litigation. Funders typically express their required return as being the sum of:
(a) the aggregate amount of funding provided to the date of the claimant's receipt of any damages awarded by the Court or, as the case may be, the date on which any settlement amount is received by the claimant; and
(b) the greater of (i) a multiple of that funding investment (sometimes as much as: x3 or more); and (ii) a set percentage (which in many cases is in the region of 30%, but can be higher) of the claimant's recoveries. This is based on the assumption that the case would conclude at trial. If the case settles earlier, some funders may charge a reduced return.
The litigation funding budget can usually accommodate payment of the ATE insurance premium (as described below) if the claimant so requires.
In this way, a claimant can procure full external funding of its claim from the point at which the funder has satisfied itself on the legal merits. That due diligence process is likely to require a legal opinion from a senior commercial barrister (King's Counsel) as to the prospects of a successful outcome. This upfront legal analysis will come at a cost to the potential claimant, but this as well, can in some circumstances, be funded externally.
Adverse Costs and After the Event (ATE) insurance
ATE insurance, also known as litigation insurance or legal expenses insurance, provides protection against the financial exposure of having to pay an opponent’s legal costs if the claimant is unsuccessful in its legal proceedings. It is so-called because the policy is purchased after a legal dispute arises.
Payment of the cost of the ATE insurance policy can be structured in a number of ways, ranging from being fully-paid at the outset, to being partly-paid at the outset, and part-deferred, with one or more subsequent tranches of the premium being paid during the lifetime of the case.
Bank-funded litigation financing, backed by insurance (or "Self-fund with insured outlay")
In this model, the claimant funds the litigation, but this outlay is insured with an insurance company in the London market (the "Outlay Insurance Policy" or "OIP"). In this scenario, payment to a third-party funder of a set percentage of any recoveries (as described above) would not apply. Rather, the cost of the premium for the Outlay Insurance Policy would be known at the outset, and could be factored into the claimant's modelling of the various potential financial outcomes of the litigation.
However, this does evidently create affordability and/or cash-flow implications for the claimant in self-funding any case through to its conclusion. This can be dealt with by the claimant obtaining a loan (from bank or other financial institution) to cover the full amount of the estimated costs of funding the litigation. The claimant's obligations under any such loan would be backed by the Outlay Insurance Policy (and secured by appropriate legal charges on that policy). Financing of the cost of the ATE insurance and the Outlay Insurance Policy may be provided by a third-party litigation funder, with the fee payable out of any recoveries, and being calculated as a multiple of the amount of the combined premium of those two policies.
Clearly, the "Self-fund with insured outlay" model has a number of moving parts, and the inter-relationship between that insurance policy, the loan, and the funding of the combined ATE insurance and OIP premium, and the negotiation of their respective terms will be complex. However, this model does have the potential to offer an alternative means for claimants to achieve, or get very near to, “no-win, no-fee“ access to litigating in English courts.
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The contribution to this article from Marsh Specialty, London is gratefully acknowledged.