Rise in litigation funding puts insurers on high alert

High profile legal cases, like 2018/19’s Justice for Subpostmasters Alliance’s claim against the Post Office, have brought group litigation cases into the media spotlight – and insurers could soon be facing an increase in such cases targeting their own firms.

According to Enable Law, “group litigations are where a number of individuals with similar claims, arising from similar circumstances – and usually against the same defendant – come together to proceed as a single group”.

The “major benefit” of this approach “is that the more individuals that are involved, the greater the investigative and negotiating power the group has”.

Barnaby Winckler, a partner at Kennedys Law, told Insurance Times that an increased awareness of consumer rights and changes to the court system have made group litigation today more popular than ever.

However, the biggest driver of this type of action has been the rise of litigation funding.

“The trend has mostly been driven by the availability of third party funding,” Winckler explained. “This is where people who don’t have claims in their own name fund litigation in return for a financial award if it’s successful.

“In a European context, the UK has been way ahead of the pack in terms of deregulating to make this possible and it is thought that the UK now accounts for 80% of this form of litigation in Europe.”

The investment environment has also played its part in the rise of litigation funding, driving investors away from equities and bonds to instead look at alternative assets to diversify their portfolios.

Maurice MacSweeney, director of legal finance and sales planning at specialist firm Harbour Litigation Funding, agreed that this model is “an attractive proposition” for investors, which has made capital more readily available for litigation funders.

Access to justice

The argument for litigation funding is that court action is expensive and the typical individual is simply not able to afford a claim, with costs often running into millions of pounds across several years.

“Without funding, these claims would never get off the ground – they are hugely expensive to bring,” MacSweeney said.

“Individual consumers may be harmed in a relatively small financial way, but collective harm is vast and unless that conduct is challenged, there’s no incentive for badly behaved defendants to change their practices for the benefit of consumers.”

Richard Orpin, interim chief executive of the Legal Services Board (LSB), agreed with MacSweeney. He added that litigation funding is an essential tool for enabling access to justice.

“One of the many reasons some people cannot pursue justice when they have a legal issue is the cost of bringing a claim,” he said. “Litigation funding can support citizens in accessing justice – it can enable David to take on Goliath.”

Critics of litigation funding, however, argue that all too often, claimants do not receive the majority of the payout, with the funders taking a large percentage of any damages.

Winckler pointed to the Post Office masters’ case as one example of this, with the litigation funders taking the “lion’s share” of the damages paid out when the convictions of hundreds of postmasters were overturned on 24 May 2024 following the Post Office (Horizon System) Offences Act passing into law.

Speaking generally, however, MacSweeney explained that the fees charged for litigation funding are proportionate given the risks involved in funding a claim.

He continued: “Litigation funding is a non-recourse investment. If a case loses, the funder will lose the many millions it may have spent on the case and capital may have been tied up for many years up until that point.

“The risk is high and it is binary – a case at trial will either win or lose and there aren’t many shades of grey in between.

“So, much like insurers, funders have to price their products in such a way that the wins also mitigate the cost of the losses.”

Orpin said the true picture of how much of the damages a funder receives may also be distorted by a small number of high profile cases, such as the aforementioned claim against the Post Office. This saw hundreds of subpostmasters convicted of theft, fraud and false accounting based on faulty IT data.

“Our research suggests that cases in which funders receive most of the damages in successful claims are rare due to competition in the funding market,” Orpin added. “So, some high profile cases may distort the overall picture.”

Driving up costs

But Winckler is still concerned that the rise of litigation funding may not be in the best interest of consumers and could, in fact, be harming them by driving up the costs associated with making a claim.

He said that litigation in England and Wales is “exceptionally risky”, with the potential for high costs, reputational damage and the obligation to pay the other side’s costs if you lose.

At the same time, however, Winckler observed that firms can’t settle too early to keep costs down because this will just create a “build it and they will come” mentality.

Consequently, defendants often defend claims vigorously and for extended periods to mitigate the risk and potentially exploit time limitations on claims, leading to prolonged and costly disputes.

The LSB has seen evidence of this type of behaviour too. Orpin noted that funders often believe that “defendants are motivated to find ways to increase costs or time” with the expectation that “funders will eventually be encouraged to settle a claim early to cut their losses”.

He warned that this is a dangerous game to play.

“This tactic appears to exploit the tension between litigation funders seeking a financial return and claimants pursuing justice,” he said.

“This could create a moral hazard whereby financers try to avoid long, costly, ongoing cases that tie up their investment, while claimants want to take a case as far as possible.

“There is a risk that commercial decisions may undermine the interests of claimants.”

Regardless of the pros and cons of litigation funding, Winckler is sure about one thing – insurers are set to face a growing number of these cases going forward.

“[With litigation funding], you get a tendency towards more and more claims being brought on the basis there will be a settlement value because everything becomes so big and expensive,” he said.

“Litigation funding can drive bad claims further than they should go and increase the cost of doing business for everybody, without necessarily benefiting people who have genuinely got grievances.”