To manage and mitigate risk, certain litigation funders use insurance when funding legal cases. Insurance also serves as a powerful tool to reassure investors and make litigation funder’s investment proposal more attractive to them.
After-The-Event (“ATE”) insurance or adverse costs insurance is the most widely used form of insurance. It protects against the risk of having to pay for the opposing party’s costs if a case is lost. This form mitigates the risk of having to suffer additional financial losses (other than the invested capital) in the event of an unsuccessful claim.
Capital protection insurance protects against the risk of losing invested capital in the event of an unsuccessful claim. This type of insurance is crucial as it addresses the primary risk in litigation funding the potential loss of the entire or part of the invested capital.
Considering the additional protection insurance offers, why don’t all litigation funders resort to it?
One of the reasons is that it is not always possible to get insurance. Since insurance in the litigation funding sector is quite recent, it is not widely available. Only certain insurance companies feel comfortable covering this type of risk, and the type of insurance provided (ATE, portfolio, capital protection) varies from one insurance company to another. Additionally, in some jurisdictions, this type of insurance may not be available at all due to the sector’s relative immaturity.
Another reason is that, as we all know, insurance comes at a cost. Given that the litigation funding insurance market is still in its early stages, premiums tend to be quite high. For litigation funders that have applied rigorous due diligence and are confident in their case selection, the added cost of insurance may not outweigh the benefits.
Despite these challenges, insurance remains a valuable tool for managing the risks inherent in litigation funding. It enhances the attractiveness of funding proposals and supports the long-term sustainability of funding operations. Therefore, when available, litigation funders should strongly consider incorporating insurance into their risk management strategy.
Interested in litigation funds? Do not hesitate to contact us at Blue Lakes Advisors
16.09.2024