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The Litigation Funding and ATE Insurance industries are anticipated to continue to grow in years to come. This, in part, is due to the growing awareness of funding and insurance arrangements in general, as well as an increase in the volume of legal actions available to fund.

In general, consumers who seek legal advice are often unaware of the full scope of the litigation finance options available to them and some law firms may not have extensive experience in litigation funding and ATE insurance policies and the current options available to their client.

From our discussions with law firms, there appears to be a common belief that Litigation Funders and Insurers are only able to fund or insure large cases.

Here we’ll discuss how this can be a misleading belief as it relates to ATE Insurance. This is an insurance policy that in effect transfers the adverse cost risk for the plaintiff to an insurer and can be extended to include own disbursement cover and an element of own solicitor costs.

When looking at an ATE application, an ATE underwriter’s main concern, in terms of the value of the claim, is whether the adverse costs are proportionate to the value of the claim. By proportionate, the insurer would expect the amount being recovered to be at least twice the potential adverse costs exposure that is to be covered by the policy. This is to ensure the plaintiff receives the majority of the monies awarded under the legal action.

As you may be aware, there is a higher multiple for litigation funders. This is due to the fact insurers have limited financial outlay on a claim until the outcome is known whereas a litigation funder could be funding a legal action for several years before the outcome is known.

A basic guideline for funding should not exceed
between 1/8th and 1/10th of the expected return

Most funders still follow this guidance because there is a strong feeling that the plaintiff should generally expect to receive back a large proportion of the award.

By way of example, if a claim is £7,000,000 and the required amount for funding was $1,000,000 the costs would exceed more than 10% of the return, therefore this would carry too much risk for most funders to take on.

Making sure the plaintiff is fairly treated is the best way for settlements to be agreed. This 1/10 rule is designed to facilitate this.

Size is not everything, but proportion and what you do with it, is!

A common misconception people have is that litigation funders are only interested in the biggest cases. This is certainly not true. As with ATE insurance, proportionality is much more important.

A realistic or even conservative view on what damages are worth, will serve lawyers well when talking with Litigation Funders. The job of a litigation funder is to be risk averse. Their whole role is about sifting out the riskier cases and therefore taking, an often, illiberal approach when analysing which cases to fund.

One top funder has said “My general rule of thumb is that if a lawyer says it’s worth $20mil, I’ll estimate it’s worth $5mil.” A sizeable buffer for what can go wrong is an essential factor for a ‘yes’ vote to fund a case.

Rate of investment isn’t the only reason for this. The assumption in the funding market is that Australian courts, unlike other jurisdictions such as the USA, do not tend to engage in big damages awards. This means that what might seem like a meaningful Class Action estimated to have $50m of damages but with $10m of costs, would unlikely be looked at.

See below for some simple examples:

Predicted DamagesCost of LitigationPotential AwardFunders Share %Funders Share $ROI %
$50,000,000$10,000,000$40,000,00025%$10,000,0000%
$35,000,000 $5,000,000 $30,000,00025%$7,500,00050%
$1,000,000 $100,000$900,00025%$225,000125%

The above chart demonstrates the most attractive ROI for a litigation funder is the lowest value case.

“Is my case big enough?”

In simple terms, damages need to be 10 times the budget e.g. cost is $10m, damages need to be $100m.

If you would like to further understand the possibilities for a particular action, here at Vie Legal Insurance we would be happy to discuss litigation funding and ATE insurance options with you.