Legal Finanace

Write by Andrew Lundberg from Burford Capital | January 22, 2019 -Burford Blog

Data breaches. Storm surge. Earth movement. Wildfires. The opioid crisis. The loss and liability environment expands and changes continually, and insurance coverage disputes — as well as subrogation claims by paying insurers — invariably follow. As insurers and policyholders tackle those resulting coverage and subrogation issues, even the most sophisticated insurance lawyers, risk managers and insurers often fail to appreciate how another recent development in the legal landscape — litigation finance — can be an important part of achieving the optimal resolution.

Despite its benefits, legal finance remains underused in the insurance space. Why? Principally, a lack of familiarity. According to the 2018 Litigation Finance Survey, which surveyed 495 lawyers at law firms and on legal teams in the U.S., U.K. and Australia, the vast majority of lawyers say they are aware of litigation finance, but only a minority have personal experience with it. Many lawyers and their clients suffer from a lack of understanding of how and when to use legal finance, or worse, harbor ungrounded fears about the category’s perceived novelty.

Fortunately, research also suggests that with continuing education in the category, lawyers and their clients will increasingly embrace litigation finance as a tool to fuel recoveries. In fact, 70 percent of respondents to the Litigation Finance Survey who have not yet used legal finance expect do so in the next two years — a principal reason why, after 35 years as a policyholder lawyer at Latham & Watkins LLP, I recently joined Burford Capital LLC to show law firms and their clients how today’s financing solutions can remove familiar obstacles that have historically stood in the way of realizing on insurance assets, whether those assets are claims for coverage or claims to recoup benefits paid out.

In my policyholder-side practice, although the large losses and liabilities in play often favored proceeding with coverage litigation, general counsels and CEOs would sometimes find the high cost of prosecuting such cases to be untenable from a current financial standpoint. They would forgo suing on a sound coverage claim, recovering nothing or settling, presuit, for a fraction of the claim’s worth. A large and pricey asset — the company’s insurance coverage — would thus be forfeited because of the prohibitive current expense of realizing on it through an hourly billing arrangement with counsel. These challenges could have been overcome with legal finance.

From the policyholder’s perspective, compared to most commercial disputes, insurance disputes are asymmetrical: Circumstances, resources and motivations typically differ for the insurer and the policyholder. For insurers, the cost of defending against coverage litigation is built into their budgets; for corporate policyholders, most of which have never sued an insurer before, the cost of coverage litigation is usually unplanned. Likewise, as repeat players — with thousands of transactions based on the same contractual language on their books — insurers have incentives to litigate novel coverage issues exhaustively to create favorable precedent, even if such litigation would make no sense on the economics of a particular case. For insurers, developments like climate change and cyberliability loom as “the new asbestos,” and they respond accordingly. And of course, companies that buy insurance do so for a different reason than insurers sell it: A policyholder is not buying insurance to facilitate its everyday profit-making operations, but rather to protect it from an unforeseen and potentially catastrophic loss. The greater that loss, the less equipped the policyholder is likely to be to take on a costly dispute with its insurer at the same time.