Legal focus: Insurers face an uncertain time over third-party litigation funding

This article was originally published in Insurance Day, November 2023.

The rise of group litigation in Europe, particularly in the UK, has attracted private investors as third-party litigation funders, whose interests lie in the potential return that may be made on their investments through the damages awards to claimants.

In recent months, the enforceability of third-party litigation funding (TPLF) agreements has been called into question, sparking calls for a full review of the TPLF market, as well as reigniting debate on its regulation.

Insurers should brace themselves for a period of uncertainty as to the progression and viability of existing third party-funded claims and with the potential for future disputes between insurers and funders.

On 26 July the UK Supreme Court handed down its landmark decision in Paccar Inc and others v Road Haulage Association Ltd and UK Claims Ltd [2023], an opt-out collective action brought before the Competition Appeals Tribunal (CAT), which was subject to a litigation funding agreement (LFA). The decision classified LFAs as a form of damages-based agreement (DBA), which are prohibited under the tribunal’s opt-out collective proceedings regime.

Potentially unenforceable

The decision caused concern within the TPLF industry as it rendered DBAs potentially unenforceable. This caused funders to undertake significant work with their legal teams to review their existing LFAs and consider entering into new, bespoke arrangements that fall outside of the scope of a DBA.

The question of how this should be approached, however, is not a straightforward one. The Paccar judgment did not set out which aspect of the LFA in question was non-compliant and there has since been speculation as to whether the offending part of an agreement can be severed from the rest of the LFA to remain enforceable.
Paccar has also brought into focus the question of whether LFAs that calculate the funder’s return as a multiple of sums invested in the legal action (the multiple approach) constitute DBAs.

The Paccar judgment did not set out which aspect of the LFA in question was non-compliant and there has since been speculation as to whether the offending part of an agreement can be severed from the rest of the LFA to remain enforceable.

This approach was recently subject to criticism in Therium Litigation Funding A IC v Bugsby Property LLC [2023]. In that case, two funders had applied for an urgent asset preservation order to preserve damages that had previously been agreed and settled.

Funders argued the LFA in question remained enforceable, as the multiple approach did not engage the DBA regime. Bugsby, however, argued as the funders’ return would be paid using damages received, it remained a DBA and therefore unenforceable. The High Court ruled Therium’s arguments gave rise to a serious issue to be tried, although it did not address any of the specific arguments raised.

Shaken confidence

Paccar has undoubtedly disrupted confidence in litigation funding in the UK. Uncertainty as to what an enforceable LFA looks like and how existing LFAs will be treated in light of the judgment risks further disputes arising.

This is of particular concern for after-the-event (ATE) insurers, particularly if the funder is the insured. Insurers could come under increasing pressure to waive contingent premiums or accept a haircut where funders are unable to recover their “success fee” from claimants. Failure to notify ATE insurers as to the potential invalidity of an LFA could lead to disputes over cover.

Insurers may wish to consider reviewing policy wordings to better protect their position and consider seeking coverage advice in the event funders refuse to pay contingent premia. Current definitions of “successful outcomes” were not drafted to address situations whereby the funded action is successful, but funders are not able to enforce their LFA and make a recovery.

Ongoing actions could be discontinued, resulting in claimants and/or funders making a claim under ATE policies. This could lead to higher premiums for policyholders in the future and potentially increased defence costs where defendants raise issues with current LFAs.

More broadly, the uncertainty surrounding LFAs could, for now, diminish appetite for group litigation. The UK Government has acted on these concerns through the tabling of an amendment to the Digital Markets, Competition and Consumer Bill on 15 November 2023. The amendment acts as a workaround to Paccar, so an LFA that provides for a percentage of damages will not be considered a DBA. However, this amendment relates to opt-out collective proceedings only and does not apply to proceedings outside the CAT.

TPLF also raises other broader questions. In the US, it is said to be contributing to the propagation of litigation due to it facilitating class actions that, in turn, are increasingly resulting in multimillion-dollar awards.

In the UK, there are concerns the reduced availability of TPLF owing to Paccar will hamper access to justice, leading to calls for a full review of the TPLF market, including its regulation. The EU is already taking such steps, having commissioned a mapping study of the TPLF market across member states before deciding whether to implement a regulatory framework. Ireland has also recently consulted on legalising third party funding and potential regulation. Against these developments, many will be waiting to see whether the UK follows a similar path.

Related item: The end of litigation funding?