The Benefits of Using Litigation Funding Over Litigation Insurance
By: Allison Chock, Chief Investment Officer US
Litigation funding and litigation insurance are sometimes compared as ways to help litigants reduce their risk when bringing contingency fee-based claims. At first glance, funding and insurance may appear to be similar, however, they are distinct tools with substantially different methods and benefits. Litigation funding occurs when a third party provides non-recourse financing for all or a part of a claimant’s litigation costs while the case is pending in exchange for an agreed-upon share of the recovery. Litigation insurance also covers legal expenses, however, potential payment from the insurance company occurs once a matter has concluded.
While litigation funding and litigation insurance can be used by claimants with any socio-economic background, insurance tends to attract deep-pocketed claimants who can afford to fund expenses through a lengthy litigation process, whereas funding appeals to claimants from both sides of the tracks. According to a recent report by The American Lawyer, a standard litigation insurance policy can cover litigation costs between 40 to 70% of attorney fees. Litigation insurance generally works “after the event.” The insurer covers the costs in the event of a loss. Policies also allow the insured to pay premiums when the case is successfully completed.
Funding, on the other hand, covers costs as they are incurred, maximizes the value of claims, and, for corporate litigants, can improve the bottom line. Here are a few key points on how litigation funding differs from litigation insurance:
• Investment. The fundamental difference between litigation funding and litigation insurance is that funding provides up-front capital to help cover the costs of pursuing a claim. For law firms and companies, the cost of litigation can be prohibitive. Even when there are meritorious claims that could produce substantial returns, claimants are sometimes forced to settle for pennies on the dollar or abandon cases entirely because of the associated legal expense of continuing to a trial. Litigation funding solves this problem by financing cases and generating a return on its investment only if, and when, the matter is successfully resolved.
• Higher Stakes. To ensure that the claimant receives the lion’s share of a successful resolution, Bentham IMF funds only meritorious, high-stakes cases that are likely to generate substantial settlements or judgments and are supported by a strong legal team. While insurers sometimes offer policies on smaller cases, to be eligible for Bentham’s funding, litigants must request more than $1 million. In addition, the anticipated settlement or judgment must exceed $10 million (exclusive of punitive damages), the defendant must have a clear ability to pay, and the litigation must have strong prospects of success. Bentham also has the flexibility to fund a portfolio of cases, giving litigants the ability to finance a number of cases while spreading their potential risk across multiple claims.
• Maximizing Value. With funding, litigants have unique opportunities to evaluate the viability of their claims and to maximize their potential value. Bentham does extensive due diligence into cases that it may fund, and in so doing, provides valuable insight for claimants about the strengths and weaknesses of their claims. If a case is funded, the money can be used to help hire the best possible counsel to effectively combat delay tactics by a well-funded opponent, and to allow the claimant to withstand low-ball settlement offers.
• Accounting Benefits. Litigation (including any associated insurance premiums) appears as an expense—a costly one—on corporate books, and a large piece of ongoing litigation can have a significant, negative impact on a profit and loss statement. On the other hand, litigation cannot be recognized as a potential asset, even in situations where the company may have a strong likelihood of a substantial recovery. The unfavorable accounting rules and the resulting drag on profits can sour companies on the prospect of pursuing litigation, even when it is meritorious and potentially lucrative. When funding is used to finance litigation, however, legal spending is removed from the books. The company’s bottom line brightens, and executives may be more likely to pursue legal claims.
To learn more about the benefits of litigation funding, contact us for a consultation.