How litigation finance can be utilized in insurance cases
Insurance-related cases are already on the rise amid the current economic turmoil, and for as many as have been filed to date, there are likely many more on the horizon. As policyholders and insurers consider how to pursue claims, they can both look to commercial litigation funding for the capital required to maximize recoveries in large-scale cases.
Funding allows parties to use a potential recovery in a meritorious claim as collateral for financing. Unlike a traditional bank loan, the financing is non-recourse, which means the funder receives a return on that investment only in the event of a successful outcome in the litigation.
This arrangement is tailor-made for large commercial litigation and arbitration matters in which legal costs and expenses are high. For its part, Omni Bridgeway (f/k/a Bentham IMF) finances single cases when the financing needed is in excess of $1 million and the anticipated judgment is $10 million or more, exclusive of punitive damages. Funding also is available for portfolios of cases, with a minimum investment of at least $2 million. In both single cases and portfolios, the defendant(s) must have the clear ability to pay a judgment and that case(s) must have a strong likelihood of success.
How a Policyholder Benefits
For policyholders, claims often follow a catastrophic event for which an insurer has denied coverage. The financial difficulties policyholders may encounter from these events can be exacerbated by the coverage denials, leaving them ill-equipped to pursue litigation against the insurer for denying coverage. As a result, they often forego their claims or settle for pennies on the dollar because they lack the time, energy, and/or resources to fully litigate the case.
With funding, on the other hand, a policyholder can hire top-tier lawyers specialized in insurance coverage matters and withstand the strain of a long litigation process. If desired, funders can help negotiate alternative fee arrangements that allow a law firm to substantially mitigate its own risk—thus attracting top-flight firms to the case. The alternative fee arrangement, in turn, helps the insured party dramatically reduce its legal spend.
Litigation funders like Omni Bridgeway are looking for opportunities to finance meritorious insurance coverage claims, especially those in which the insured already has incurred or paid substantial costs for property damage losses. Demonstrable bad faith on the part of the insurer is helpful to the funder, because it creates greater potential liability on the part of the insurance company. Examples include when the insurer fails to conduct a proper investigation, fails to consent to a reasonable settlement, declines to communicate with the policyholder, or takes unreasonable coverage positions.
And funding is not limited to first-party coverage claims. A company can utilize funding to help it pursue third-party claims as well, such as when an insurer denies coverage for the defense or indemnity (payment of a settlement or judgement) in a mass torts or securities case. Moreover, funding from Omni Bridgeway can also be utilized in domestic and international arbitrations—allowing policyholders whose disputes must be resolved by arbitration to also benefit from our disputes financing.
Funding Scenarios for Insurers
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. These matters tend to be complex, involving an insurer in lengthy and potentially expensive litigation with no guarantee of success.
A few law firms have built substantial practices taking on subrogation work. In general, these firms offer to take on portfolios 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 for recovery is strong, firms take on all the risk and must often wait through a lengthy litigation for a payout (if it comes).
By partnering with a funder, these firms are no longer burdened with the full risks of carrying fees on a contingency. They can immediately realize revenues and still share in a portion of the upside from a substantial recovery. Meanwhile, an insurance company can derive revenue from claims that may have gone by the wayside, without deploying its own capital on legal expenses.
Funders also can help insurers and their outside counsel maximize their returns from reinsurance claims. 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 good 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 already are in the business of sharing risk, litigation finance may be a good fit for them, too.
A Special Case: Entertainment
Funding’s flexibility can make it a particularly valuable tool for companies and outside counsel in an industry with its own unique insurance-related issues: entertainment.
For example, a funder can help entertainment and production companies reduce out-of-pocket costs and improve the bottom line in many different types of claims, including cast insurance battles and denials under event cancellation. Cast insurance provides extra dollars should a cast member fall ill or pass away, allowing the company to finish a film or television show. Event cancellation insurance provides coverage for losses caused by the cancellation, postponement, relocation, or curtailment of events. If the insurer rejects a claim or provides a low settlement amount, the policyholder may need to sue to enforce its policy.
But such lawsuits tend to take a long time. Funding offers a flexible solution. Working with a funder, for example, a studio may even be able to free up capital to help finish its film or a production company may focus on marketing campaigns for other events, while simultaneously pursuing claims against the insurer.
For outside counsel, developing a relationship with a funder that is adept at financing entertainment industry claims—especially one like Omni Bridgeway—can be beneficial. Firms can use litigation funding across a portfolio of cases, enabling them to offer alternative fee arrangements and creative solutions for reducing client risk, which, in turn, can open the doors to new, high-profile entertainment industry clients.
Learn more about how litigation financing can help your company or law firm finance insurance-related cases by contacting us for a consultation. And visit our Company Insights to find information about the CLE seminars we offer to companies interested in working with funders and our recent client podcasts, blog posts, and videos.