Since the Jackson reforms were implemented in 2013, law firms handling disputes worth less than £1 million outside of personal injury have had much greater difficulty finding ways to fund their clients’ cases. The simple reason is that the cost of litigating modest value cases does not fall proportionately with the value of the claim. There is no magic wand that can be waved to fix this problem. Absent the recoverability of after the event (ATE) insurance premiums and conditional fee agreement (CFA) success fees, some cases simply cannot obtain access to justice with the costs regime as it is.
However, there are competitive forces driving people to work hard to bring down the price point for risk capital in litigation funding. There are two things a provider can do without reducing the quality of the product itself (for example, the risks covered or funded). The first is to spread their risk, and the second is to reduce the administrative cost that comes with underwriting litigation risk.
Block-rating
To some extent, the prospects of a case settling increases as the claim value decreases. This is because there is a greater chance of the defendant subscribing to a nuisance value settlement. It is very difficult for an insurer or funder to build in a discount for such potential unless they can adopt a statistical approach across many cases, and not just rely on a single outcome. This is the notion of “block-rating”, where the price point for any single case is reduced to an average so that, while a case may be an outlier that is fought all the way to trial, the price paid is based on an assumption that it won’t.
Block-rating was starting to make traction in low value commercial cases between 2010 and 2013 before the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPO), with several law firms signing up to facilities that allowed them delegated authority to fund or insure their cases if they fit eligibility criteria. Many were following in the footsteps of their personal injury colleagues who had made a success of the same approach. However, after LASPO, those delegated schemes were halted, because few firms could justify the block-rating after the volume of low value commercial cases anticipated to drop sharply after the reforms to CFAs.
This meant that far fewer risks were bound, and without the spread of risk, providers would charge more per risk than they would have needed to under a scheme.
Obviously the paying party for the ATE premium changed with LASPO, but there is some irony that when one just thinks about the price of risk, the reforms have led to low value commercial ATE premiums becoming more expensive on average because the cases are individually rated. By now, block-rating could have accounted for more risks than facultative rating, but that was not to be and block-rating pretty much disappeared outside bodily injury risks.
Greater efficiency
Litigation funding and insurance can be a costly endeavour, but not just because of the risk of losing capital or the opportunity cost of tying up capital for many years. Those risks are managed through the quality of case vetting and the generation of a high volume of enquiries from which one can cherry pick the best cases. The real cost of litigation funding is the cost of the quality control and the business development processes themselves. They cost hard cash and are not linked directly to any return: in fact quite often they are incurred on cases which are never funded at all because they were not signed off for investment, or because an offer was not taken up.
For litigation risk takers, the expense of these processes can rarely be justified by the returns available from low value cases. This is what led to the “race to the top” by the participants in the fledgling litigation funding market. At that time, funders rushed to be big enough to attract the market’s largest cases where the costs-to-damages ratio was not a major factor.
However, in 2020, there is more risk capital than there is supply of high quality and high value cases. Funders are trying harder than ever to make the mid-lower value market viable, so that they can deploy their money in an increasingly crowded environment.
We should expect to see more innovation in the way risk providers participate in multiple risk outcomes in a manner that can help them spread their risk. Moreover, we should expect to see more ways in which providers reduce the cost of vetting cases.
Inevitably, these aims will be pursued through the use of technology to drive the cost of risk capital down, for example by:
- Increasing the volume of relatively homogenous cases types over which insurers can spread risk using a matrix and eligibility criteria, so that the price generated for any risk is in greater tune with the insurer’s own portfolio.
- Substantially reducing the amount of contact underwriters need to have with cases by reducing the vetting according to the terms being offered digitally.
There will be many other ideas and initiatives as more of the funding market’s capital trickles down from the larger cases. In most instances, the individuals involved in the market prefer the small cases in general and some even despise the long tail nature of big ticket litigation, so if steps are taken to make modest value cases economically viable, there will be happy clients, lawyers and underwriters.
