Litigation funding and insurance: avoiding rogue players
In any financial services sector, you will find a spectrum of companies with different credentials. At one end of the spectrum there will be legitimate entities, highly experienced companies serving the needs of their client base and moving the industry forward. However, at the other end there will be those less credible outfits that can damage client confidence and cast a shadow over the industry.
Unfortunately, the litigation funding and after-the-event (ATE) insurance market is no exception. The past few years has seen several market entrants purporting to be funders or experienced brokers entering the market, but scratch below the surface and it quickly becomes apparent that some of these entities are little more than one-man bands operating using city postbox addresses, potentially unlicensed (if a broker) or under-capitalised (if a funder) and with limited direct experience, yet holding themselves out to be credible parties for international law firms to introduce to their clients. Imitation might be the highest form of flattery, but it can equally be disruptive and destabilising for the growth of a market.
Does it really matter?
In short, yes. The litigation funding and ATE insurance market is complex and requires expertise in order to navigate it successfully. Expertise comes from experience and, in this industry, there are no shortcuts to success. The most reputable litigation funders, insurers and brokers have solid experience earned through the execution of thousands of finance and insurance transactions for commercial litigation and arbitration cases.
Over the years, TheJudge has seen numerous market casualties of what we will call “rogue players”, companies that have entered the market offering products and services built on sand. For example, entities that lack technical knowledge of the products they sell, are under-capitalised, or are using risk assessment processes and pricing models that are doomed to fail from the outset. These players mistakenly see the market as a route to a quick buck, with little personal downside. They surface for a short period and then disappear into the night and it’s easy to think that no harm has been done. Yet this is far from the case. The downside is very real and often it is the client that is left holding the baby or their lawyers whose reputation is damaged when things go wrong. It may be the case that the funder does not have the funds to see the matter through to conclusion, leaving the claimant unable to continue with their case in the absence of another funder. Or that the client could learn that they could have saved a significant amount of money if they had received more rounded advice on the options available, such as the use of litigation insurance as a cheaper alternative to funding where cash flow is not a primary concern. In addition, the law firm might face a claim by their client over the advice they gave. At TheJudge, we’ve seen dozens of such claims over the years.
The players that have successfully operated in the market for some time have witnessed what can go wrong and are committed to safeguarding the client’s interests as much as possible; including the purchase of substantial professional indemnity insurance to provide additional client reassurance for the rare occasion when damage is caused as a result of an error on their behalf.
So how do you identify these “rogue players”?
Unfortunately, it can be difficult, but here are few points to note:
Litigation funding is largely an unregulated industry. Numerous “faux funders” exist. These are entities holding themselves out to be funders when in fact they are better described as brokers. Alternatively, they aspire to be a funder and seek to generate a pipeline of cases that they will then use to attract the capital for their fund. If their capital raise fails, as many do, months of wasted time can be incurred by law firms and litigants alike. We’ve seen this across the market with faux funders holding themselves out as specialising in small funding deals through to mass large value incidents involving a serious lack of transparency. For example, we are aware of one faux funder who had sought to bundle a number of prospective enquiries with an aggregate funding commitment exceeding £100 million, only to then try to raise capital behind the scenes. All the while, the lawyers and clients were being given excuse after excuse as to why the due diligence wasn’t progressing or committee sign-off hadn’t been achieved.
Ultimately, it is important that the claimant or their lawyer carry out due diligence on the funder to ensure that they actually have access to the cash they have agreed to commit to the case. A long delay in the process of obtaining funding can be a warning sign but, having already invested time in making the application, it can feel like you are trapped in the process. Whilst funding is a privilege rather than a right, there is a growing number of funders with an increasing amount of capital all competing for a very limited number of good cases. Claimants with good prospects of successfully recovering a decent level of damages from a solvent opponent are likely to have the pick of the bunch. Never be afraid to take the time at the outset to ask the funder questions about their ability to fund and, if the process is taking significantly longer than they said it would, find out why. If the answer doesn’t add up, consider whether you are talking to the right funder for your case. A reputable funder will be willing and able to allay your concerns.
A broken broker model
The role of a broker can often be confused with the role of an introducer (an individual or company that simply connects two others). While these two roles can be interchangeable in a highly commoditised product or service industry, the litigation funding and insurance market is anything but highly commoditised and significant distinctions can apply between the two. It is important to know which of these roles your intermediary is intending to undertake.
Understanding the dynamics of the market, which funder or insurer is most likely to offer competitive terms, whether a funding or insurance product is appropriate for a client’s needs and what issues may arise, requires a strong depth of market experience.
A middleman by any name should add value. Whether that value manifests itself in financial terms through a broker’s ability to source or tailor commercially advantageous arrangements, or whether it’s through an introducer’s ability to provide expertise that aids or speeds up the process of obtaining the requisite funding or insurance, any intermediary worth their salt will justify their involvement.
A word on pay-to-play media: paid for badges of honour
The age of free information online has decimated print media and, to ensure their survival, several media companies are now largely reliant on their advertising and sponsorship income to survive. As a result, many media outlets have moved to paid for article contributions and speaker slots at conferences. Such an approach is not a problem where the media outlet can find the happy medium of an expert that is willing and able to pay the rack rate. Unchecked, however, the pay-to-play approach provides inexperienced players with a platform that implies a certain level of experience because, historically, it was only available on an invitation basis. Don’t buy in to believing someone is an expert because they’ve spoken at a number of conferences. Check out their background and ask them lots of questions. Real experts are often passionate about the market and they’ll be readily able to demonstrate their experience to you.
Choosing your broker, funder or insurer partner should be subject to scrutiny. Ultimately, it is in the legal community’s collective interest to ensure the litigation funding and ATE insurance market continues to develop in a sustainable and credible manner. Identifying rogue players can be difficult, but red flag signs often exist if you take the time to dig a little deeper.
This article originally appeared on the Practical Law Dispute Resolution blog.
Director of Business Development
+44 (0) 203 965 5333
Email Verity here