As first appeared in NewsBreak
By Aron Solomon
Insurance companies entering the $13.5 billion litigation finance industry are changing how things work. They are bringing in insurance products that help funders reduce costs, protect investments, and make legal processes less risky while also turning them into financial gains.
Insurance offerings like judgment preservation insurance (JPI) and after-the-event (ATE) insurance are part of these products. They help those supporting lawsuits cut expenses, safeguard their investments, and minimize the risks associated with legal actions.
Take judgment preservation insurance (JPI), for instance, which protects a share of awarded money in a case, and after-the-event (ATE) insurance, covering lawsuit expenses like legal fees. This provides funders with more ways to handle financial risks in supporting legal cases.
While this opens doors for funders and LPs, insurers are worried about issues like adverse selection and uneven information. Third-party litigation funding is seen as a key factor increasing risks for insurance companies, resulting in larger claims and defense costs, particularly in general liability, medical professional liability, and commercial auto product liability cases.
The impact and role of insurance companies in the litigation finance industry is an ongoing complex and evolving issue that requires a mutual understanding between the two sectors. While some view litigation funding as a factor in the emergence of large settlements, others argue that the relationship between litigation funding and insurance settlements is not straightforward.
As Philadelphia injury lawyer Richard DiTomaso points out, there are also regulatory issues at play here. “Because regulations in the litigation funding industry are still emerging, there is often insufficient transparency, raising concerns about the fairness of the arrangements in some cases.
DiTomaso also very clearly expressed the view of some lawyers against litigation funding in an interview with me, “Litigation funding becomes more precarious as many firms do not use a proper retainer agreement so that the costs of the funding can be passed onto clients. It is especially problematic because the interest rates are quite high and would erode one’s settlement. As such, victims of accidents should consider using a firm that does not use such litigation financing tools. My firm has never employed litigation funders and never will so as to ensure the client’s maximum recovery.”
A December article in Bloomberg Law raised a very interesting angle in all of this. The insurance sector’s involvement has led to some talent leaving the litigation finance industry, with insurance-backed legal finance creating what some see as a new competitive landscape.
The Bloomberg piece details several instances of the “brain drain” that is seeing some senior litigation finding talent leaving for similar senior roles with insurance companies.
But these are surely early days – probably far too early to determine whether the growth of insurance companies in the litigation finance space is going to take away from litigation finance companies or simply add-on to the industry as a whole.
Yet as I wrote two years ago, many lawyers see litigation funding as an important strategic tool. In the two years since my piece, the litigation funding industry has grown to the point where it is solidly on track to hit close to becoming a $25 billion industry in the next four years.
What is very timely and interesting is that the insurance industry’s strong play in the litigation finance industry – which will help fuel this growth – comes on the heels of the industry criticism of the litigation finance industry itself.
In December, the Insurance Information Institute published a report advocating for the disclosure of third-party litigation funding arrangements. As Bloomberg reported, this insurance industry report describes litigation funding as a “moral hazard” and emphasizes that it is no longer just about David vs. Goliath, but about speculative investors profiting from cases more likely to result in significant settlements.
The report’s focus on the potential negative effects of litigation funding aligns with a broader debate in the legal and insurance industries. Critics argue that litigation funding can lead to longer and more costly legal proceedings, as well as larger settlements based on intangible factors, such as pain and suffering, rather than concrete damages.
The report argues that what is needed is a push for greater transparency in the legal and insurance sectors, particularly to ensure that all parties involved in a lawsuit are aware of and account for the influence of third-party funders. Yet the arguable irony is that at the same time as this insurance industry report calls for disclosure of funding arrangements the industry is pushing harder into litigation finance.
The overarching lesson here might be that there are potentially far greater benefits for litigation finance firms and insurance companies to work closer together than to simply be in competition.
While there are valid concerns and challenges that both the insurance and litigation finance industries need to address to work together more effectively, it may very well be worth the effort if the end result is a larger litigation funding pie.
This is going to be very interesting to watch in 2024. If the insurance companies and the products they offer can supplement the expertise of litigation finance companies, they might find synergies that help fuel further growth of the litigation finance industry.
About Aron Solomon
A Pulitzer Prize-nominated writer, Aron Solomon, JD, is the Chief Legal Analyst for Esquire Digital and the Editor-in-Chief for Today’s Esquire. He has taught entrepreneurship at McGill University and the University of Pennsylvania, and was elected to Fastcase 50, recognizing the top 50 legal innovators in the world. Aron has been featured in Forbes, CBS News, CNBC, USA Today, ESPN, TechCrunch, The Hill, BuzzFeed, Fortune, Venture Beat, The Independent, Fortune China, Yahoo!, ABA Journal, Law.com, The Boston Globe, YouTube, NewsBreak, and many other leading publications.