The litigation funding and insurance options that can help you manage disputes risk

If you have what appears to be a good claim, not pursuing it could mean losing the chance to realise a contingent asset. However, the legal costs of bringing claims can be high and the outcome of litigation or arbitration inevitably involves an element of uncertainty. There is therefore an element of risk involved in bringing any claim and you could end up out of pocket. You could also end up obtaining judgment but still find yourself unable to recover from your opponent, despite having paid out your own legal costs.

A number of options have been developed to reduce the financial exposure to these risks. Several of these can be used in conjunction, although each of these options will mean a certain loss of control or choice for you. For example, if you fail to comply with terms relating to settlement, the funding may be terminated. It is important to consider your full range of options to understand which products, or combinations, best suit your aims and appetite for risk.

Insurance: BTE and ATE

Legal expenses insurance protects you from having to pay your opponent's legal costs. This type of policy is often combined with a contingent fee agreement (CFA), which reduces your exposure to your own lawyers' costs, in order to achieve an overall funding solution.

You should consider whether you already have insurance in place which might include cover for legal expenses: this is known as 'before the event' (BTE) insurance. If so, you should check the limits on the policy. It may be that the insurer will want to be subrogated to the claim and so take over control of the proceedings.

Where you do not have BTE insurance in place, 'after the event' (ATE) insurance might be an option. ATE insurance is taken out after a legal dispute has arisen. It can be taken out at any stage but usually becomes more expensive and difficult to take out the further the case has progressed.

Typically, an ATE insurance policy will cover your own disbursements and the other side's legal costs if you lose the case. It is also possible to insure your own costs and disbursements, but this is less common. The premium you pay for the ATE insurance will not be recoverable from the other side, even if you win the case.

Having an ATE insurance in policy place can put pressure on the other side to settle the dispute, because it shows that you have minimised the litigation costs risk and that an insurer has assessed that you have a good (greater than 60%) chance of winning the case. It can also, conversely, become an inhibiting factor because you will want to recover more than the premium you have paid for the policy.

As well as requiring that the chances of success are greater than 60% when you obtain insurance, the insurer may also be able to withdraw cover if the likelihood of success falls below that level during the course of proceedings. Policies also usually contain a number of exclusions from cover, such as where your opponent becomes insolvent. These factors need to be taken into account in addition to the cost of the premium, which can be significant, and the need to pay irrecoverable upfront costs (including obtaining a QC's opinion) in order to obtain cover.

Legal costs: CFAs and DBAs

A CFA is a risk-sharing agreement between a solicitor and a client in which some element of the fees charged depend on a condition being met (for example, a "win"). Generally, the arrangement will be that if you lose, you will not be liable to pay those fees and any expenses that fall within the agreement, but if you win, you will be liable for all the lawyer's fees and expenses plus, if applicable, a success fee (an uplift on those fees based on an agreed percentage, which cannot be more than 100%). You may be able to recover your costs and your lawyer's standard fees from your losing opponent, but they will not have to pay the success fee.

Various types of CFAs are available: for example you might agree a CFA with a discounted hourly rate, whereby the law firm will be paid at the discounted hourly rate whatever the outcome of the proceedings, but will forego the balance of its base costs if the client loses, and will recover the balance of its base costs (with or without a success fee) if the client wins.

It is also now possible to have a Damages-based Agreement (DBA), which is a "no win, no fee" arrangement between a solicitor and client, under which the client pays the solicitor if it obtains a "specified financial benefit" (usually damages paid by the losing opponent). That payment will be a percentage of the damages recovered from the other side. However, if the client loses, it does not pay its solicitor and will still be potentially liable for the winning side's costs. Few law firms are prepared to enter into a DBA.

Third party funding

In view of the limitations above, you may also wish to explore the option of obtaining funding from elsewhere. It may be that there is an associated company or shareholder who would be willing to fund the costs of the dispute. If so, this type of funder could be at risk of a non-party cost order against it.

More usually, funding might be obtained from a third party (professional investors or hedge funds) with no prior connection to the case, who agrees to finance all or part of your costs in return for a fee payable from any proceeds recovered from the other side. The funder is likely to insist upon a minimum return, which will be a multiple of the funds committed by it for the case. On top of this sum, it is common for funders to be paid a percentage of the damages recovered. We have seen percentages ranging from 10% to 40%, depending on the quantum of the damages claim and risk factors.

What this means exactly in terms of the amount of damages that is left for the claimant is of course a function of the amount of the damages and the anticipated costs of pursuing the case. It therefore means that a claim needs to have a certain minimum value in order for third party funding to be financially viable. There is no set minimum value for claims and different funders focus on different claim values, but in general, funding really only makes sense where the claim value is in the millions.

Funders will also look at the likely enforceability of the award, which will have an impact on the overall costs, the likelihood of a successful recovery of money and the length of time that the funder’s capital will be tied up. The enforceability will therefore depend on both:

• the creditworthiness of the opponent; and
• the jurisdiction in which the defendant’s assets are located and whether there exist treaties for enforcing damages awards in that country.

Taking all of these risk factors into account, the funder will decide whether it is willing to fund the dispute and if so, the level of return it will be looking for. The funder’s success fee is a matter for negotiation: there is no standard formula or amount, no minimum and no maximum. But it is true that the funder will be looking for a high return on what is generally regarded as a high risk investment in litigation. The lower the chances of success, the lower the ratio of damages to costs, and the lower the chances of enforcing an award of damages, the higher will be the return that the funder will be demanding.

Third party funders usually provide funding to claimants, although sometimes a defendant can receive funding too (for example, where there is a large counterclaim or the defendant can give the funder a stake in a future asset or income).

Because the funders receive nothing if you lose the case, they will only take on cases with a good prospect of success. Third party funding is potentially available for a wide range of claims for monetary damages and may also be available to fund the enforcement of any judgment in your favour.

Litigation funding, insurance and risk-sharing fee arrangements have evolved from a niche industry to become a mainstream part of the disputes landscape. There is no one-size-fits-all solution but considering the range and combinations of options can help you to ensure that you can pursue good claims in a way that fits your risk appetite.