How does litigation funding compare with liability insurance?
They are in many ways strikingly similar and in one obvious way they are very different. Litigation funding is on the plaintiffs’ side of the litigation, insurance is on the defense side. Litigation funding is seeking to maximize recovery to the plaintiff and insurance is trying to minimize payment to the plaintiff. You look at them and say they are mirror images of each other. They are very similar. All involve three parties: the funder, the lawyer and the party to the litigation. But they have exactly the opposite purposes. Notwithstanding they operate in very similar ways. They are both designed to help with the party to deal with consequences of litigation by shifting costs and risks to someone else.
How do policy holders and plaintiffs differ?
The difference between the two reflects our familiarity with the two arrangements. If you go back in time when liability insurance was new, in the late 18th century, early 1900s, you find a fair amount of unease about the existence of insurance companies and 3rd
parties to litigation bearing the costs. What’s that going to do, if you can shift the costs to someone else,. The courts initially had some discomfort with that. But we came to understand that. Liability insurance is a helpful way of dealing with some of the risks in litigation and so over the period of 100 years we got comfortable. There are still some areas of unease on the defensive side. The insurability of punitive damages still is up for grabs and not lawful in some jurisdictions. Liability insurance is something we have grown familiar with over time and generally speaking we are comfortable with.
What do you see in the future for litigation funding?
Litigation funding is the new innovation on the plaintiffs’ side. Whenever we see something new, people are initially concerned about it, they are worried about it, fear it and they fear it may have unintended consequences but my hunch is that the history going forward will be the same for litigation funding as it was for liability insurance. The more widespread it becomes, people will see that this is similar to what we’ve always had. The funding of litigation by contingency fee lawyers. It just so happens that there are other entities who can provide funds more efficiently and make litigation cheaper and help plaintiffs deal with the risks a little better. We’ll get used to it.
University of Texas Law School