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Lawsuit funding sparks insurer concerns

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legal funds

Litigation funding, in which capital is provided by a third party to finance lawsuits in return for a share of the ultimate settlement or award, is growing in the United States.

Insurers and others contend it leads to increased claims and rates, while often permitting funders to conceal their involvement, thus obscuring potential conflicts of interest.

Its proponents maintain they help fund justifiable litigation on a highly selective basis and have a hands-off policy as to becoming directly involved in litigation strategy.

Litigation funding, also called litigation financing, is used in a range of lawsuits, including complex multidistrict and class- action litigation.

At its most basic, unlike contingency funding, where plaintiff attorneys operate on a no win/no fee basis, third party funders provide financial help in exchange for an interest in a potential recovery. The financing can be offered to law firms who are unwilling or unable to fund a potentially protracted case or to help underfunded claimants.

“There’s no limit to the types of risk that we look at, both first party and third party, wildfire, hurricane loss, product liability, and, of course, COVID business interruption,” said G. Andrew Lundberg, Los Angeles-based managing director of Burford Capital Ltd., a litigation funding company.

Widely used in other countries, litigation funding is being used more frequently in the United States but may not become as popular here (see related story).

Many insurance industry participants are unhappy with the growth of litigation funding. Jennifer Marshall, a director in the property/casualty ratings department at A.M. Best Co. in Oldwick, New Jersey, said it puts upward pressure on claims costs and drives increases in awards and settlements. 

Having a third party that potentially profits from a lawsuit prolongs a claim “and makes it more expensive to resolve,” said Meg Sutton, New York-based senior vice president of U.S. casualty claims for Liberty Mutual Insurance Group.

A settlement may be rejected because of pressure exerted by litigation funders seeking a profit on their investment, and a plaintiff may walk away with nothing if the trial goes against them, its opponents say. 

Laura Lazarczyk, executive vice president, chief legal officer and corporate secretary for Zurich North America, said in a statement that litigation funding companies’ “abusive practices will be largely borne by insurers in defense costs and indemnity payments and by policyholders in uncovered losses and higher premiums related to increased litigation, often frivolous, driven by the profit motive” behind the business model.

“We don’t need new mechanisms in society to sue people. We have enough of that probably in most cases, and I don’t think we need more,” said Jane Njavro, senior vice president and partner with Woodruff Sawyer & Co. in San Francisco. 

But Eric J. Blinderman, CEO (U.S.) for litigation funding company Therium Capital Management Ltd. in New York, said litigation financing helps in “David versus Goliath” situations where small plaintiffs get litigation help against “well-heeled, competent, large defense firms” that will “bury them in paper and do whatever they can to use the tools of the litigation process” to help win their case.

An oft-voiced objection raised by litigation funding critics is that, depending on the jurisdiction, its role in litigation is not necessarily publicly revealed. 

While the U.S. District Court for New Jersey held in June that third-party litigation funding must be disclosed, attempts to pass federal legislation requiring such disclosure have so far been unsuccessful.

“It’s a multibillion industry with no regulation and no requirements for transparency,” said Page C. Faulk, senior vice president of legal reform initiatives at the U.S. Chamber of Commerce’s Institute for Legal Reform in Washington, which calls for litigation funding’s disclosure. “It is essentially turning our U.S. courtrooms into casinos, which is why the chamber is calling for disclosure.” 

Disclosure “eliminates any conflicts of interest and sets the floor for the fair administration of justice,” Ms. Sutton said.

Katelynn O’Rourke Gorman, a partner with Clyde & Co. LLP in New York, said she has worked on cases where she suspects litigation funding was involved but has been unable to confirm it. She advocates disclosure because third parties have a vested interest in litigation’s resolution. 

It’s hard to track the effect of litigation funding on cases because it is not always known whether funding is involved, said Tim McCarthy, actuarial product director for commercial liability at data analytics and risk assessment company Verisk Analytics Inc. in Jersey City, New Jersey.

Under Federal Rule of Civil Procedure 26, insurance details must be revealed and, arguably, the same principle should apply to litigation funding “to make sure everyone has a full understanding of the underlying facts of the litigation,” he said.

Buford Capital’s Mr. Lundberg said litigation funding is “not relevant in the same way insurance coverage is required to be disclosed in litigation,” where parties are “effectively insured or indemnified against a bad outcome.” 

Therium’s Mr. Blinderman said judges have “nearly unanimously ruled the extent of litigation financing is both irrelevant to the underlying merits of a dispute” and subject to privileged protection.

Commercial litigation funders never select counsel, have no “seat at the settlement table and expressly disclaim in contracts the right to control litigation,” he said.

 

 

 

 

 

 

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