Why insurers are learning to favour dispute funding

Insurers
Author:
Gavin Beardsell
Senior Investment Manager, Head of New Zealand - Australia

In markets like Australia, conventional wisdom previously held that insurers avoided dispute funding because they had to defend against class actions financed by funders. They may also believe that funding contributes to a general atmosphere of greater litigation risk.

But a significant change in attitudes is underway, according to experts who took part in a recent webinar exploring the use of dispute funding in insurance-related cases. Insurers, they said, are discovering funding’s effectiveness as a tool for financing their subrogated recovery claims.

I think that that dialogue and understanding is slowly changing as [insurers] realize funding is a tool,” said Maurice Thompson of the global law firm, Clyde & Co. Gavin Beardsell of Omni Bridgeway added, “The tide is slowly turning, and we’re seeing insurers embrace third-party funding and sharing the risk as well as the rewards of a successful recovery.”

The webinar included a panel of seasoned lawyers and litigation funders, including Thompson, who is a Partner and National Group Head of Clyde & Co’s Australian Energy, Marine and Natural Resources practices, and Beardsell, who is a Senior Investment Manager and Head of New Zealand at Omni Bridgeway, and a former Partner at large insurance law firms in the UK and Australia.

Why Insurers Are Using Funding

Thompson discussed the factors that are attracting insurers to funding options. Dispute funding, he said, is useful in any number of litigation scenarios that the insurer may face, and is particularly useful in recovering on subrogated claims. “If you’re defending on a coverage position and you’re looking at a valid claim from your insured, and you pay it out, then you simply use funding as a tool to turn around and bring your subrogated claim against a third party,” he said.

The willingness of funders to also offer non-recourse financing for portfolios of claims makes funding even more desirable. Ultimately, you'll see more and more insurers taking up a funding option, because quite frankly, if you have a behemoth like Omni Bridgeway willing to do a deal on a portfolio of insurance claims, then it really is a game changer for the insurer,” Thompson said.

A funding arrangement allows the insurer to immediately transform unrecovered subrogated claims into a cash-generating financial asset.

The financial benefits extend to law firms as well. A portfolio of funded insurer-side cases “provides a degree of certainty across a whole range of matters that really is quite powerful from a legal practice business perspective,” Thompson said.

Thompson also noted that the process of working with a funder can help lawyers strengthen their cases and ease client concerns as well. Funders, Thompson said, will ask “absolutely every devil's advocate question…Your pitch to the funder has to be so sophisticated for them to say ‘yes, we'll proceed with this’.

He added, “you get that peace of mind for the client moving forward and a super boost of confidence that your case has been reviewed absolutely forensically by the funder.” Thompson said the funder is motivated to reduce its risk by “throwing all of its intellect at the case.” For lawyers and clients who go through this process and receive funding, “rest assured that you have a really good case on your hands,” he said.

Warranty and Indemnity Claims

Based in Omni Bridgeway’s Sydney office, Beardsell explored the current status of insurer-side cases in the Australia and New Zealand funding markets. He cited a significant increase in activity involving subrogated recovery claims under Warranty and Indemnity (W&I) insurance policies.

A typical scenario may involve a merger or acquisition where the buyer has a W&I policy. Post-transaction, the buyer may learn that certain issues were not disclosed by the seller. As a result, the buyer turns to its W&I insurer for payment of losses rather than making a claim against the seller. “Often those payouts can be significant,” Beardsell said. “A number of W&I insurers are looking to litigation funding to finance subrogated recovery claims—often against the professional advisors in the due diligence process.”

Beardsell said insurers are also “dusting off their portfolios of settled claims and doing an audit to see what is in there that could result in a recovery,” Those portfolios can then be financed by a funder, with the insurer retaining control over the litigation. Another option, in jurisdictions where assignments of claims is permissible, is to sell the portfolios to a funder. “We are open to exploring both of those options,” he said.

The full webinar, “Understanding and Unlocking the Value of Litigation Finance for Insurance Claims for Both Policyholders and Insurers,” can be accessed on demand with registration. It is one of a series on dispute finance and litigation-related topics created by Omni Bridgeway and hosted by Chambers Events.

To learn more about Omni Bridgeway’s dispute funding capabilities, visit our Company Insights. While there, explore our recent podcasts, blog posts, and videos. Or contact us for a consultation to learn more about the ways we can help you pursue meritorious claims.