Insurance is an increasingly popular option to mitigate the financial risk of a damages-based agreement. Verity Jackson Grant explains how it works and the potential benefits for your firm.
Most disputes lawyers will have come across cases that would have been perfect for a damages-based agreement (DBA). Indeed, the growth of the litigation funding market suggests that there are plenty of viable disputes to invest in. If a case is ripe for litigation funding, it follows that it should be economically sound for a lawyer to handle under an outcome-based retainer. So why are lawyers seemingly so content to refer their best cases – along with the potential for significant success fees – to litigation funders in return for the payment of their standard hourly rate (or even a discounted rate)?
It ultimately comes down to cashflow and law firms’ appetite for risk. For many firms, the financial implications of a loss when their full fees are at risk are too much to bear.
DBA insurance is proving to be an attractive solution to this economic dilemma because it ensures the firm receives some fee income when acting under a DBA, regardless of the outcome of the case. This type of insurance is proving popular on both sides of the Atlantic. In England and Wales, however, where hybrid DBAs are currently unlawful, DBA insurance has an added benefit in that it can create a synthetic hybrid arrangement without leaving the client liable for the portion of the fees for which the firm does not wish to bear liability.
Understanding the options underpinning competitive outcome-based retainers puts you in the best possible position to make commercial decisions that win new business and increase profitability for your firm.
How does DBA insurance work?
DBA insurance is a policy taken out by a law firm to provide an indemnity for an agreed portion of its fees, typically 50%. The policy can also cover 100% of any disbursements or counsel’s fees that the firm has agreed to take responsibility for under the terms of its DBA.
The policy does not pay out on an ongoing basis, instead it reimburses the firm for the insured amount in the event the case is unsuccessful. However, with the insurance in place, many law firms are willing to notionally “bank” the insured fees for internal revenue recognition purposes.
Unsuccessful cases
If the case is unsuccessful, the insurer reimburses the law firm for the agreed insured portion of fees incurred in pursuing the case. Moreover, if the case is successful but the success fee recovered is lower than anticipated, the insurer will step in to pay the difference between the fees recovered and the amount insured.
Successful cases
If the case is successful and the firm recovers a success fee sufficient in size, then a premium is payable from the surplus of the success fee collected after the law firm’s base fees (or some percentage thereof) have been paid. The premium will typically be expressed as a fixed amount or a percentage split of the surplus success fee, which may be also be capped at an agreed amount.
Benefits of DBA insurance
Many may ask: “Can’t a litigation funder do the same thing?” Absolutely it can. But there are two key benefits to insuring a law firm’s fees rather than funding them: cost and recovery. I look at both below, as well as three additional benefits for firms using DBA insurance.
1. Lower cost
Insurance is significantly cheaper than litigation funding, which enables the law firm to retain more of the success fee. An insurance premium is, typically, between 20% and 40% of the cost of a funder’s success fee.
If cash flow is a key concern, the two products need not be mutually exclusive, however. The firm could have the benefit of DBA insurance and still arrange funding for disbursements, for example.
2. Priority recovery for law firms
The waterfall in a funded arrangement usually gives priority to the funder. An insurance policy will typically guarantee the law firm’s recovery as the priority, with the insurance premium paid from the surplus success fee to the extent there are sufficient funds. This means that the law firm is likely to have a quicker route to earning more than its hourly rate.
3. Keeping the client relationship simple
The insurance agreement is between the law firm and the insurer and there is no need for the client to be involved.
4. Early availability
For good cases, DBA insurance is likely to be available at a much earlier stage than litigation funding. In addition, in our experience, the average time to secure formal offers of DBA insurance is two and a half weeks from submission, much faster than the average assessment timescale of most litigation funders.
5. Reduction in write-offs
Lawyers often have to write off fees incurred in seeking funding, especially when funding cannot be agreed. The fact that DBA insurance can be put in place more quickly than funding enables you to spend less time finalising the fee agreement and move onto focusing on the substantive legal work involved in the case.
This article was written for The Law Society in August 2019. Please click here to view the original version.
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