In Insurance Coverage Disputes, Litigation Funding Eases the Path to Recovery

July 10, 2019


By: Fiona Chaney

Assume a major hurricane has hit the coast, with a resort hotel on the shore suffers devastating losses. Buildings have been severely damaged and business has been disrupted for months while the hotel owners repair the property. Making matters worse, an insurer is refusing to pay these substantial losses despite the insured having paid for a multi-million-dollar policy.

For the hotel’s owners, the prospect of a taking on the insurer in the wake of such a disaster is especially daunting. Despite having a meritorious claim with a substantial chance of success, the insured in this situation has already paid millions of dollars out of its own pocket for repairs as well as the costs of keeping their business afloat.

Enter litigation finance, which provides a well-tested method for helping the insured in this situation recover its money without putting additional hard-earned resources at risk. Commercial funders like Bentham IMF finance meritorious, large-scale claims, allowing claimants to hire the best possible counsel and maximize their recoveries.

With litigation funding, the insured receives an investment collateralized by its litigation claims. The funding is non-recourse, which means the funder receives a return only in the event of a successful recovery from the litigation. If a claim fails, the funder does not recoup its invested capital.

The non-recourse nature of funding also allows an insured far more flexibility than a traditional bank loan. Take the case of the hurricane-ravaged hotel: Funding can be structured to cover legal fees and to provide working capital that will help keep the business operating as the owner awaits the outcome of the insurance coverage dispute.

Keep in mind, funding is not limited to first-party insurance coverage claims like those of the hotel. A company may utilize a funder to help it pursue third-party claims as well. For example, it may seek funding for litigation against an insurer that is denying coverage of the defense and/or a multi-million-dollar judgment or settlement in a mass tort or securities case.



For their part, litigation funders like Bentham IMF are looking for coverage claims with merit, especially those in which the insured already has incurred or paid substantial costs for property damage losses or, in the third-party context, have already been defended and settled for millions of dollars without the assistance of an insurer that denied coverage.

Demonstrable bad faith on the part of the insurer is also helpful to the funder, because it creates greater potential liability on the part of the insurance company. Some examples of such bad faith claims include when: the insurer fails to conduct a proper investigation, fails to consent to a reasonable settlement, declines to communicate with the insured, or takes unreasonable coverage positions.

At Bentham, one of the criteria we use to evaluate cases is significant damages of at least $10M for every $1M of funding. Perhaps the most attractive cases for funders are coverage cases involving settlements approved by a court or resolved through a mediator’s proposal. Settlements reached in those cases are even more likely to appear inherently reasonable to a court considering an insurer’s denial of coverage.

In many insurance coverage cases, the insured may forego their coverage claims or settle for pennies on the dollar because the insured lacks the time, energy, and resources to pursue litigation—a reality some insurers use to their advantage in not paying claims. After already expending millions toward losses or claims, an insured (or its legal department’s budget) often is not in the position to pay top-flight counsel who can charge millions in fees to recover tens of millions in a coverage case.

But working with the funder, the insured can assert its rights with minimal up-front investment. The litigation funder can assist the insured in negotiating an alternate fee arrangement that allows the law firm to dramatically mitigate its own risk and the insured to reduce its legal spending to out-of-pocket legal costs—a far better scenario for the insured than walking away from its claims. Moreover, Bentham’s litigation funding also may be utilized in arbitrations—both domestic and international—such that insureds with arbitration provisions in their policies may potentially qualify for funding. 

In the weeks and months ahead, we’ll further discuss how litigation finance can be used in insurance coverage disputes, including how funding can be used to help finance subrogation and reinsurance related matters.

In the meantime, contact us for more information or a consultation on financing an insurance coverage disputes.