5 ways to avoid common errors made by lawyers when arranging litigation funding

5 ways to avoid common errors made by lawyers when arranging litigation funding

Litigation funding: where lawyers go wrong

Charting the complex world of litigation funding can be tricky, not least because the insurance market does not stand still.  Here Matthew Amey looks at the five most common errors lawyers should avoid when arranging litigation funding.

1.         Forgetting about enforcement

One of the most common reasons for a funding application being rejected is the lack of visibility over the collection on any award in the claimant’s favour. Some lawyers put huge amounts of effort into convincing underwriters about the merits of the case without providing any visibility on enforcement. Evidence of assets and a viable strategy for enforcement (things like timescales, procedures and the budget post-award) should be a high priority when a lawyer makes an application.

2.         Not contacting funders simultaneously & entering into exclusivity too early

These are two different issues but they are connected.

Funders do not relish the idea of being asked to fund cases previously rejected by other funders. They prefer to be the first to look at a case, and also, to be the only one looking at it. This desire, whilst commercially understandable from the perspective of the funder, is not wise from a client’s perspective in the absence of a very compelling reason to narrow a search to one provider.  All funders ask for details of any prior rejections so approaching funders one-by-one can be hugely prejudicial. A lawyer should approach a number of funders simultaneously.

Similarly, with requests for exclusivity, lawyers shouldn't abandon a competitive tendering process too readily and in the absence of a very compelling reason in the client’s best interests.

3.         Preparing for questions about risk/reward alignment

Funders (and ATE insurers) want to understand who else will be sharing the upside and downside in the case. Lawyers need to be ready to field questions from funders on their willingness to share the risk, whether through a CFA or DBA.

It is not just questions about risk but rewards too. Funders worry about quantum. A CFA or DBA success fee that is staged by reference to the level of recovery instils confidence. If a lawyer cannot or will not share risk, a pre-prepared explanation of why the funder should not find that worrying is advisable.

4.         Failing to consider the importance of quantum

Since the recoverability of CFA uplifts and ATE premiums were abolished[1], cases need to have enough value for the Claimant to be able to deduct any CFA uplifts or ATE premiums from the proceeds whilst still leaving them enough damages i.e. enough to make the whole litigation process worthwhile for the Claimant.

Some lawyers find it hard to adjust to the new economic realities of funding litigation after LASPO, especially in cases where the level of legal costs exceeds the level of the potential proceeds.  Funding such cases is very difficult, if not impossible.

5.         Abusing funders and insurers – the reputation problem

This last of the top-five common errors, is more a long-term mistake made by individual lawyers and sometimes firm-wide.

Activity such as settling cases by disclosing quotations from interested funders (and insurers); making applications far too close to trial; applications immediately following a clearly adverse development and making applications following prior rejections from a preferred funder are all evidence of what is known as “adverse selection”.

Evidence of adverse selection has a cumulative impact on the reputation of a fee earner and the firm they represent in the funding market which, over time, can lead to blackballing and a demonstrable reduction in the lawyer’s ability to source good quality offers for clients.

Matthew Amey is a  Director of  TheJudge – Independent litigation insurance and funding brokers.

[1] following the Legal Aid, Sentencing and Punishment of Offenders Act from 1st April 2013

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