Litigation funding

Litigation funding is seen as a valuable tool in ensuring access to justice as it enables individuals or groups to bring actions they may not otherwise be able to afford, typically without the need to repay the funder if the case is lost. However, the sums recovered by funders can be substantial and the market is, as yet, unregulated beyond a voluntary code of conduct.

Unsurprisingly, the US leads the way in litigation funding, with an estimated $13.5bn of assets under management in 2022. As is often the case, the UK has followed in the footsteps of the US and now has a well-developed market which has grown exponentially over the last decade. In 2022, PwC UK predicted assets under management would grow by 8.7% per annum over 5 years, from £2.2bn in 2023 to £3.7bn by 2028.

Historically in England and Wales, third parties were prohibited from financing lawsuits in return for a share of the proceeds. These barriers were broadly removed with the passage of the Criminal Law Act 1967, however it was the combined effect of the Woolf reforms in 1999 and the Jackson reforms in 2010, with their focus on access to justice, that paved the way for litigation funding to proliferate.

Whilst civil justice reform was the enabler for litigation funding, the economic environment in the UK has provided much of the impetus as investors have sought to diversify away from equities and bonds and have recognised that returns on litigation funding can be highly attractive. This has helped the market to mature and it is now able to offer sophisticated funding solutions tailored to different types of complex litigation.

Insurance is an essential tool in litigation funding. It usually takes the form of ATE (after the event insurance), which is purchased after a legal dispute has arisen and protects funders and claimants against the risk of losing and being held liable for the opponent’s legal costs. However, BTE (before the event) cover and specialist Indemnity Insurance purchased to protect against a specific legal risk on a case (such as a particular adverse court order or an unexpected claim by a third party) can also be utilised. Insurance helps litigation funders to manage their risk and the process of obtaining cover itself provides a further layer of due diligence regarding the merits of the case.  

Group actions and large commercial disputes are an obvious target for litigation funding given the often very large sums involved. This has supported the increase in group actions in the UK with pretty much every such case having a litigation funder sitting behind it. This is why litigation funding is a hot topic for many insurers, as it facilitates the bringing of substantial cases that have not been seen in the past. However, that is not to say that all cases are taken on, with estimates suggesting that around 90% of cases put forward to litigation funders are rejected based on their selective criteria.

Undoubtedly, the most high-profile group action supported by litigation funding in the UK in recent years is the High Court case of Bates and Others v Post Office Limited [2019]. In part because of the length of that litigation, the funding and legal fees were far in excess of the sums secured by the claimants. Outcomes such as this can seem disproportionate and raise the question of whether the sector needs greater regulation, potentially including a cap on what litigation funders can recover and the need for greater transparency of funding arrangements.

However, in terms of access to justice the case is still viewed by many as a success because the favourable judgments vindicated the claimants, opened the door for the independent inquiry, which is currently ongoing, and impelled the government to set aside £1bn to be paid to the victims by way of compensation.

In July 2023, a question over the future of litigation funding was raised as a result of the Supreme Court judgment in PACCAR (Paccar Inc and others v Road Haulage Association Ltd and UK Claims Ltd [2023]). The Supreme Court held that many litigation funding agreements (LFAs) which allow funders to recover a percentage of damages (rather than a specified sum) are, in fact, damages-based agreements (DBAs) and therefore only enforceable if they comply with the relevant regulations that govern DBAs.  Furthermore, DBAs are prohibited in the Competition Appeal Tribunal (CAT) which is the only forum in England & Wales where opt-out collective actions can be brought.

This has required funders to urgently review their agreements and has also led the government to look at legislation to reverse the effects of that decision – a discussion that is currently ongoing in Parliament.

Whatever the outcome of that debate, it seems clear that litigation funding is here to stay and therefore it is important that insurers understand it as a feature of the UK legal system.