The Litigation Risk Transfer Market..The Lord Justice Jackson effect James Delaney

[Litigation Risk Transfer] Key Products After the Event Insurance Third Party Funding Before the Event Insurance Litigation Buy-out Insurance

BTE Legal Expenses Insurance Pre-paid (traditional) insurance to cover legal expenses in the event that a dispute occurs (i.e. not applicable for existing disputes). Sold as an add-on to household/motor Jackson recommends greater take-up – Is it realistic? Limited cover/indemnity e.g. pi, clinical negligence, employment Commercial BTE - take up is nominal. Access to Justice – Different mindset of BTE v ATE underwriters.

ATE Insurance Provides an indemnity for costs if the case is lost. Potentially insures: i) Adverse costs ii) Own side disbursements iii) Own side lawyers fees. Wide spread application in civil litigation i.e. personal injury/ clinical negligence. Increasing application in SME & large business disputes. In England & Wales the premium is currently a recoverable cost (Access to Justice Act 1999). The premium is typically deferred and contingent upon success i.e. only payable if the case is won + heavily discounted for early settlement.

ATE – Jackson Implications Concerned premiums too high and used tactically to the detriment of paying parties. Recommending removal of recoverable additional liabilities i.e. success fees/ATE premium. One way cost shifting in personal injury + some other areas. Eradicate need for adverse cost insurance.

ATE Personal Injury Market Implications? Reduced ATE PI market. Disbursements only ATE insurance. Large question mark over the appetite of insurers to support a limited “disbursement” market. [ Mixed market opinion ] Premium for any disbursement only cover paid from client’s damages – Risk of adverse selection against insurers.

Commercial/Non PI ATE Insurance Eradicating recoverability of premiums will prohibit clients’ ability to insure and thereby pursue their cases - Why? Small business disputes – Proportionality Issues The Asia experience - Cost v Damages Ratio (good cases uninsurable) Cases with non monetary remedies won’t be insurable e.g. IP infringement proceedings etc… David v Goliath - Goliath can force a settlement at undervalue

Jackson ATE Impact Big Ticket Cases Concerned that big business can utilise a system intended for impecunious clients. Is the concern misguided? Greater propensity for global settlements inclusive of costs. Keeping recoverability for some but not others requires - means testing but how? Would commercial ATE survive without premium recoverability? Yes but with a more restrictive qualifying pool of insurable cases + increased adverse selection risk.

Third Party Funding What is it? –Professional Funder with no prior interest in case –Provides cash flow for legal costs –Share of proceeds Cost to the client –20-40% of damages? – % min return on investment? –Typically works best in large disputes with a large damages v cost ratio.

Third Party Funding – Jackson Implications Generally a thumbs up endorsement by Lord Justice Jackson. Removal of Arkin cap could prohibit funders. Funders are unlikely to be interested in bridging any gap for small business disputes left by eradication of recoverability. Funders in UK need buoyant ATE market to mitigate their adverse cost exposure. Restricting ATE market growth could inhibit the growth of the funding market.

Litigation Buyout Insurance (AKA Outcome Hedging / Stop Loss Policy) What is it? Defendant client facing actual or possible litigation Policy providing hedge on risk by capping potential liability at a certain level Insured’s retained element of risk (retention/excess) Jackson implications? None.

The Future of the Market? Hedging legal costs is here to stay both in the UK and internationally. Individuals, SMEs and large blue chip clients – Continual education/promotion of “hedging risk” by lawyers/funders/insurers Huge international growth ahead with litigation insurance being applied in Asia, Australia, Canada, Europe and US. Insuring attorney fees in the States provides an economic alternative to contingency fees. Continued growth of litigation funding – albeit restrictive market in comparison to the size of the litigation insurance market.