A smart way to share the risk in subrogation and reinsurance cases

For insurers and their outside counsel, litigation finance can offer creative ways to pursue subrogation and reinsurance claims that otherwise may have been left behind.

Insurers have rights of subrogation that allow them to try to recoup the costs they have paid out to a policyholder from a responsible party. For example, in a train derailment, the insurer may pay hundreds of claims to property owners, under their first-party property damage insurance policies, whose buildings were damaged. Then, assuming the railroad was liable, the insurer would assert its subrogation rights and pursue a claim against the railroad.

Of course, not all claims are straightforward and insurance companies often avoid taking risks on subrogation cases for any number of reasons. For example, collectability might be an issue against an individual drunk driver being sued for millions for causing an accident. Subrogation matters also tend to be complex, involving the company in lengthy and potentially expensive litigation with no guarantee of success.

However, where larger parties are involved, collections may be more likely to occur. A few law firms have capitalized on this tendency and built practices during the last few years to take on subrogation work (e.g., one AmLaw 200 firm promotes its annual $200 million in recoveries on behalf of subrogation clients.) 

In general, firms offer to take on a portfolio of subrogation claims on a full contingency, retaining a substantial piece of the upside in the event of a successful judgment or settlement. While the potential recovery is strong, for the firms involved this means taking on all the risk. They may be saddled with expert witness and other substantial costs and must wait through completion of the case for any money to appear in the firm’s coffers. 

Subrogation claims aren’t the only opportunity to deploy litigation financing to help improve recoveries. Insurers and their outside counsel also can partner with funders to maximize their returns from reinsurance claims.

In reinsurance matters, an insurer may write a large policy for its insured and then take out insurance (or “reinsurance”) on that insurance policy. Reinsurance can be something of an infinite loop:  The reinsurer can insure its contract, as well, and so can other reinsurers on down the line. The farther away from the initial contract, the cheaper the insurance. In essence, every entity involved in the insurance process is attempting to mitigate their risk.

Naturally, disputes regularly arise among reinsurers over which party is responsible for payment and for how much. And, like policyholder litigation, reinsurance battles can be long and costly. 

These cases are a strong fit for litigation finance because they are essentially breach of contract matters that are not fact-driven and often are resolved by judicial officers rather than unpredictable jurors. Because reinsurers are in the business of sharing risk, litigation finance may seem like a strong fit for them, as well. The funder is providing non-recourse funding to finance meritorious claims in exchange for a portion of the settlement or recovery–helping reinsurers substantially reduce their risk.  

In both subrogation and reinsurance matters, law firms with an entrepreneurial streak can expand their practices and reap the rewards of a recovery. Partnering with a funder can help them achieve these goals–without taking on the risk of a full contingency. And insurance companies can derive revenue from claims that may have gone by the wayside, without deploying their own capital on legal expenses.

Learn more about how litigation financing can help your company or law firm fund subrogation and reinsurance claims by contacting us for a consultation. And visit our Company Insights for information about the CLE seminars we offer to companies interested in working with funders. There, you also will find our recent client podcasts, blog posts and videos.