REUTERS | Thomas Mukoya

How law firms are using insurance to overcome their fear of damages based agreements

The introduction of damages-based agreements (DBAs) as part of the Jackson reforms did not have the immediate impact on law firm retainers that some may have expected. Whilst most lawyers would have been attracted by the potential for huge returns in successful cases, the early years saw few firms willing to step into what they considered to be a minefield. Their reticence was due, in part, to concerns about the drafting of the DBA Regulations and, in particular, the inability to offer “hybrid” or partial no win, no fee arrangements.

Notwithstanding the fact that most disputes lawyers will have come across cases that would have been perfect for a DBA, the financial implications of a loss when their full fees are at risk are often too much for a law firm to bear.

DBA insurance offers a solution to this economic dilemma by providing the law firm with the financial comfort needed to offer DBAs in return for significant success fees. Whilst the policy deals with the economic concerns of offering DBAs, we also sought to overcome the concerns regarding drafting the agreements themselves. With this in mind, we have worked with specialist counsel to offer solutions that help lawyers to get comfortable with the regulations when drafting their retainer. As a result, we have seen a marked increase in the number of cases that we see with a DBA in place.

DBA insurance is a policy taken out by the law firm to cover a portion of the firm’s fee risk under a DBA. This type of insurance is proving popular on both sides of the Atlantic. However, it has the added benefit in England and Wales (where hybrid DBAs are unlawful) of enabling the firm to offer a full DBA to the client whilst ensuring the law firm receives some fee income, regardless of the outcome of the case. In short, DBA insurance offers a synthetic version of a partial DBA without leaving the client liable for the portion of the fees the law firm does not wish to bear.

If the case is lost, the insurer reimburses the law firm for an agreed portion of the fees incurred, typically 50%. The policy can also be tailored to cover 100% of counsel’s fees and other disbursements where the law firm is responsible for these under the terms of the DBA. If the case is successful and the firm recovers its success fee, the law firm accounts to the insurer for the premium.

Importantly, the premium is only payable if the case generates sufficient fee income for the firm. The emphasis is on actual recovery and so the policy provides comfort to the law firm, not just in the event of a loss, but also in the event of a low award or a failure to recover the damages from the opponent. The insurance protects a minimum realisation rate, whilst the product overall is an enabler for the firm to access higher realisation potential than they may obtain through other financing options, or a conditional fee arrangement.

The ability for the law firm to keep a share of the damages, rather than see the proceeds of their success passed to a funder, is a key benefit to utilising DBA insurance. Yet, the two products need not be mutually exclusive. The firm could have the benefit of DBA insurance and still arrange funding to finance the disbursements or to provide some cash flow during the life of the case. Whether used instead of or in addition to third party funding, the use of DBA insurance offers the following additional benefits:

  • The simplicity of the relationship with the client: The insurance agreement is between the law firm and the insurer, and there is no need for the client to be involved. In our experience, most clients would prefer to negotiate their fee arrangement directly with their lawyer than have the added complexity of a third party funding arrangement. Many clients fear that the involvement of a funder can lead to a loss of control of the case, a hindrance in their ability to make quick decisions, privilege issues and the leaking of information.
  • The speed in which a policy can be put in place: DBA insurance is likely to be available for good cases at a much earlier stage than third party funding. In addition, in our experience, the average time to secure formal offers of DBA insurance is two and a half weeks from submission, vastly quicker than most litigation funders’ assessment processes.
  • A reduction in write offs: One of the biggest complaints that I hear lawyers make about obtaining funding is the difficulty they experience in securing an acceptable offer for their client, and how that translates into wasted fee earner time if funding cannot be agreed. The fact that DBA insurance can be put in place more quickly than funding enables the lawyer to spend less time finalising their fee agreement and allows them to move on to focusing on the substantive work involved in the case.

Having the flexibility to offer alternatives to the hourly rate is becoming more and more important. Increasingly, the good mandates will be won by the law firm that offers a sustainable fee arrangement that demonstrates their trust in the claim and protects the client’s down side without compromising on quality and without the need to involve a third party funder. It is likely that a combination of this client pressure, the prospect of attractive returns and the comfort of DBA insurance will lead to law firms taking on more damages based agreements.

The Judge Global Verity Jackson-Grant

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