Triple-I Weblog | Litigation Fundingand Social Inflation: What’s the Connection?


Second post in a row on social inflation and litigation funding

Litigation funding – where a third party pays all or part of the cost of a litigation swap for an agreed percentage of the settlement – is often cited as a contribution to social inflation. But like so much to do with social inflation, it is unclear how widespread this practice is.

With historical roots in Australia and the UK, investor funding for lawsuits has taken off in the US in recent years. On the plus side, it can allow plaintiffs to use experts to develop effective strategies – options previously only available to large corporate defendants.

But it can also help bring cases to court that are based more on the expectations of investors than on the interests of the plaintiffs.

Undermining general prohibitions

Litigation funding was once largely banned. The relevant legal doctrine – called “champerty” or “maintenance” – originated in France and came to the United States via British common law. According to an analysis by the international law firm Steptoe, the original purpose of chamber bans was to prevent financial speculation in legal proceedings and was rooted in a general distrust of litigation and lending money.

Ironically, here is that a major social force driving social inflation today – corporate distrust and litigation – once established the prohibition of a practice that is now widely associated with the phenomenon.

These bans have been eroded over the past few decades, leading to an increase in litigation funding.

“If you’re trying to understand how we got here, I’d say you’re starting in the 1990s,” said Victoria Shannon Sahani, law professor at Arizona State University’s Sandra Day O’Connor College of Law. “The United States isn’t really a big player on the scene yet, but Australia and the UK have taken steps independently in their terms that paved the way for litigation funding to spread.”

Between 1992 and 2006, Sahani says, “It was kind of a Wild West of Australian law in the sense that if you got involved in litigation funding, you always ran the risk of your agreement being challenged.”

In 2006, the High Court of Australia clarified, saying that litigation funding was allowed in jurisdictions that had abolished alimony and liberty as a crime and tort. In fact, it was acceptable for a funder to influence important case decisions.

It took a while for the practice to catch on in the United States as the chambers’ ban was left to the states. Some have given up their anti-chamber laws over the past two decades. Some, like New York, have introduced “safe havens” that exclude transactions over a certain amount of dollars from the reach of chamber laws.

“In view of the associated risks in many cases, it will be interesting to see whether litigation financiers refrain from direct involvement.”

– David Corum, Vice President, Insurance Research Council

Uncertainty about market size

According to Bloomberg law, there is no consensus on how much investors spend each year on US lawsuits, “but it’s not $ 85 billion, a figure recently referred to as the” addressable market “for litigation funding by a public litigation financier became. ”

That’s because during a 12-month period that began in mid-2018, the industry spent only about 2.7% of $ 85 billion, according to a survey by Westfleet Advisors.

“Does this low penetration rate indicate explosive growth?” Bloomberg Law asks. “Or is it an indication that litigation funding is a niche product that most plaintiffs and lawyers find unnecessary?”

A key growth driver could be the willingness of funders to remain uninvolved in handling cases, said David Corum, vice president of the Insurance Research Council: “Given the challenges that arise in many cases, it will be interesting to see if litigation funders are involved Refrain from direct participation. “

Benefit, Curse, or Both?

While funders are promoting the “David versus Goliath” aspect to help small business claimants, opponents worry about bringing profits to a lawsuit aimed at a fair outcome. Settlement can be rejected due to pressure from for-profit funders, and a plaintiff cannot get away with litigation against him, opponents say.

Laura Lazarczyk, Zurich North America’s executive vice president and chief legal officer, described litigation funding as “improper” and said the damage “is largely borne by insurers in defense costs and compensation payments, and by policyholders for uncovered claims and higher premiums carried”.

Critics also criticize the lack of transparency. While the US District Court for New Jersey ruled that third party funding must be disclosed, attempts to pass state disclosure laws have been unsuccessful.

“It’s a multi-billion dollar industry with no regulation or transparency requirements,” said Page C. Faulk, senior vice president of law reform initiatives at the US Chamber of Commerce. “It essentially turns our US courtrooms into casinos, which is why the Chamber is demanding disclosure.”

These concerns prompted the American Bar Association last year to approve best practices for companies involved in litigation funding. The resolution is silent on disclosure, but calls on attorneys to be prepared for an examination. It also cautions them against providing advice to donors about the merits of a case, and warns that doing so could raise concerns about dissolution of legal privilege and expose attorneys to allegations that they have an obligation to update these guidelines as the dispute progresses.

Back in the series

Social inflation: Eating the elephant in the room

More from the Triple-I blog

What is Social Inflation? What can insurers do about it?

Litigation funding rises as civil bans are eroded by courts

Legal Group Approves Best Practices in Support of Litigation Funding

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IRC Study: Social Inflation Is Real, Harming Consumers and Businesses

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