Complaints against third-party litigation funding tend to focus on a few oft-repeated points. Increased litigation, class actions in particular, ostensibly cause insurance rates to rise. Funders aren’t always required to disclose their funding agreements, ostensibly hiding a potential conflict of interest. Finally, funders are blamed for a supposed increase in frivolous actions—even though no funder wants to take on a case without merit.
An LFJ Conversation with Michael Kelley, Partner, Parker Poe
Complaints against third-party litigation funding tend to focus on a few oft-repeated points. Increased litigation, class actions in particular, ostensibly cause insurance rates to rise. Funders aren’t always required to disclose their funding agreements, ostensibly hiding a potential conflict of interest. Finally, funders are blamed for a supposed increase in frivolous actions—even though no funder wants to take on a case without merit.
Business Insurance details that what often gets left out of these conversations is the risk funders are taking. If a case is unsuccessful, the non-recourse nature of funding agreements means that funders lose their entire investment—often a significant loss. It’s this risk that mandates what are viewed as high percentages for funders.
Insurers in particular are unhappy with the funding industry. This is understandable, given that funders have supported many actions that held insurers accountable. One representative from Zurich North America refers to ‘abusive practices’ by litigation funders as leading to hardships for insurers. One partner with Woodruff Sawyer & Co lamented that there’s no need for new ways to sue people. Surely, policyholders whose coverage is in question would disagree.
Is it correct to call third-party funding an industry with ‘no regulation and no requirements for transparency,’ as Page Faulk of the US Chamber of Commerce’s Institute for Legal Reform does? Not exactly. While regulations for funders vary from one jurisdiction to the next, legislation and precedent are developing further with every new case.
Eric Blinderman of Therium Capital Management explains that legal funding eliminates ‘David v Goliath’ cases where small plaintiffs get pushed into lowball settlements, or drag cases on for untenable lengths. Litigation funding is a tool for the little guy—so it’s no surprise that the big guys don’t like it.
