Five top tips for managing funded or insured claims

Written on 2 Feb 2021

There is growing awareness of the value of third party funding and different forms of legal expenses insurance for those claimants who want to avoid a good claim becoming a drain on capital.

But the list of options and terms can be bewildering: LFA, ATE, BTE, DBA, CFA … how should claimants (and some defendants) who are looking to offset some of the risk of litigation go about agreeing and balancing the multiple agreements that they may have to sign, to enable a funded claim to go ahead? And what do litigants need to keep in mind when negotiating the necessary agreements?

Here are our top five tips for making sure that third party funding doesn't cause more problems than it solves.

1. Choose the right funder or funding structure for your type of claim

Some funders prefer certain types of claim, and some will favour very large claims. Make sure you consider more than one funding offer – perhaps consulting an independent specialist broker – to ensure that you are getting a good deal. And remember that claims may take some time to resolve, so choose a funder you are sure you will be able to work with in the long term.

Sometimes third party funding may not even be the best solution. Discuss with your lawyers whether they will act on a discounted fee with an "uplift" if you are successful in the litigation. This is generally cheaper than third party funding. Check whether your insurance policies already have some allowance for legal expenses

2. Anticipate the effect of unforeseen expenses on your claim

As well as funding your own costs, consider what would happen if you are unsuccessful in your claim, or a preliminary court application related to it, and are ordered to pay your opponent's costs. Do you want insurance to cover this risk?

What happens if the costs of litigation exceed the amount that the funder initially agreed to cover. Will your funder increase the funding? What will you do if it won't, and what will it cost you if it will?

Most funding repayments are based on a "multiple" of the money paid out by the funder, so the end-costs can increase quickly if you add to the budget. Make sure your claim still makes sense if you have to give up a large percentage of your recovery.

3. Consider taking independent advice on the funding agreement

Some law firms have dedicated relationships with certain funders or insurers, or are able to act on low conditional fees because they are backed by litigation finance. Where more than one person is entitled to payment out of a claimant's damages this will need to be set out in a carefully negotiated "priorities agreement". While every lawyer is obliged to act in their client's best interests, a third party view may be valuable where the law firm has a preferential relationship with specific funders (Osborne Clarke does not).

4. Be prepared for change

Claim prospects change, delays can occur, defendants may demand security… Discuss at the outset with your team– lawyers, funder, insurer – what flexibility there might be for changes to any agreement. In particular, ask an insurer whether it has the capacity for more cover if needed, and how much a facility that guarantees it will meet a defendant's claim in spite of policy terms allowing the insurer to refuse cover (an "anti-avoidance endorsement") will cost. On the other hand, do you want an option to discontinue funding if you later find the cash? Which brings us neatly to….

5. Stick by your decision to use third party funding/insurance

Funders understandably hate "buyer's remorse" and will protect themselves against it. If a claim can be funded by the claimant, careful thought must be given to using litigation finance. Would a combination of funding and carrying your own risk for opponents' costs be your best option? Work out how much the funder is likely to be paid in the face of different outcomes and whether you will be prepared to live with that.

Most funding agreements will make sure that the funder is still fully compensated if the claimant wants to get out of them: if this is a possibility in your case, consider it right at the outset.

Osborne Clarke has extensive experience of advising on all these types of arrangement and managing funded claims. Please get in touch if you would like to discuss how we can help you.