The $13.5 billion litigation finance industry attracts new competition from the insurance sector. The entry of insurers into this space provides law firms with alternative financial tools for legal actions, and they have been successfully drawing talent from traditional funding pillars.
Insurance brokers such as Aon, CAC Specialty, and Willis Towers Watson Plc have moved into the space of litigation finance companies. The move comes as the class of assets has surged in popularity since it was first introduced a decade ago. Litigation finance involves investors paying the cost of a lawsuit, or for a portfolio of lawsuits, in return for a portion of the award in successful cases.
Insurance companies, since 2019, have boosted their offerings of judgment preservation insurance, a policy that guarantees a slice of an award. In the past year, they have also expanded into providing policies to law firms for an entire docket of cases.
The resulting insurance-backed legal finance involves covering all of a law firm’s out-of-pocket costs and a portion of the legal fees, in a case or a portfolio of cases. The law firm or client could approach a capital provider and offer the underlying litigation and the insurance policy as collateral, a move that is reportedly attractive to law firms and their clients due to its economical nature.
This entry of insurers has led to a migration of talent away from litigation financing. Examples of such transitions include the move made by Megan Easley, senior vice president of contingent risk solutions at CAC Specialty, who served as legal counsel for funder Omni Bridgeway until last year. Easley holds that insurance offers more tools and ways to create positive outcomes for clients.
However, despite the increased activity of insurers in the litigation finance space, litigation funders maintain that they have not felt overwhelmed by the new competition according to Cesar Bello, Research and Portfolio Manager at Corbin Capital Partners. Bello mentions that litigation funders still constitute a large portion of the market and are typically more willing to fund early-stage cases than insurance companies.
Past reports by insurers have received criticism from funders. For instance, the Insurance Information Institute, an industry association, published a report last year detailing concerns insurers should have about litigation funding, describing it as a “moral hazard.”
Despite these criticisms, the insurers have been gaining exposure in litigation finance on both the defense and plaintiff sides, says David Perla, co-chief operating officer of Burford Capital.
While the insurance sector offers new competition, it has not gone unnoticed that this year was challenging for litigation finance. An uncertain economy, coupled with an influx of new funders, led to difficulty in fundraising, contractions, portfolio selloffs, and layoffs.
With additional reporting from Bloomberg Law.