It may be thought that there is an uneasy relationship between after-the-event (ATE) insurance and third-party funding (TPF), but my experiences have shown that this is certainly not the case.
This is due, in part, to the fact that ATE insurance and TPF do not always cross paths. This is because, generally, third party funders look for cases that have a 70 per cent chance of succeeding, while ATE insurers look for prospects of around 50 per cent.
As such, funders are effectively concerned with monetary claims, while ATE insurers are happy to insure non-monetary claims.
Funders have so far mainly backed insolvency and professional negligence disputes. Under the existing Solicitors’ Code of Conduct, solicitors are not able to use TPF for any claim involving death or personal injury, meaning that disputes such as pharmaceutical claims cannot use TPF. ATE insurance, on the other hand, can be used for a whole variety of disputes – from personal injury and clinical negligence to commercial matters.
Another difference is that certain ATE insurers are willing to insure cases where solicitors and barristers are being paid their full hourly rate, while funders normally expect at least 30 per cent of the solicitor’s hourly rate to be at risk.
There is a gearing aspect for funders, in that their business model expects the opponent to reimburse their investment – plus a reward that is approximately three times the investment provided. ATE insurers are not affected by this gearing, and so can look at a wide basket of cases that is not dependent on the value of the claim.
It is obvious, then, that there are a number of dispute types that will never see an ATE insurer compete with a funder. But even for those where the two do compete, it is possible for them to work together.
This can be seen in an Addleshaw Goddard case that QBE has recently insured in the largest funding package assembled in the UK, combining conditional fee arrangements (CFA), ATE insurance and TPF. The resultant package enabled 500 private individuals to pursue their claims for recovery of losses – in excess of £50m – following the failure of 19 complex investment schemes.
Without this financial package, these individuals would have been denied access to justice through their lack of financial resources and by being exposed to the possibility of very significant adverse costs – consequences of being up against “deep pocket” defendants.
So if ATE insurers and funders work together, credible claims that might never have seen the light of day because of the lack of funding can actually be pursued.
The effect of the credit crunch upon funders has already been seen over the past two months. Claims Funding International finding that one of its financial backers had pulled out is just one example.
In another case, where QBE was working with one law firm to write an ATE policy, the funder the law firm had been speaking with withdrew from the case because it had no new funds to invest. But the action was not stifled as QBE issued an ATE policy and a bond to deal with an order for security for costs in that action.
Nevertheless, the threat to access to justice is clear. Just when it seemed that there were more funding options available, the economic downturn has conspired to threaten one of those funding mechanisms.
Putting it baldly, this is bad news for our civil justice system.