Many lawyers face a dilemma while applying for litigation funding and insurance: how should they treat an unexpected mediation mid-application? While mediation is an important opportunity for any client, it can raise complicated questions on whether to put the funding and insurance applications on hold and try to settle or secure a funding arrangement while there is still an offer of funding on the table.
It’s an all-too-familiar scenario in the litigation funding market: after advising a client on the availability of funding options and undertaking a search of the market, thankfully it emerges a funder or insurer is willing to offer financing or insurance for the matter. Attracting a funder’s interest can be a long and sometimes tedious process, involving intense due diligence and tough negotiations on price, but with the hard work of arranging the deal behind you, the client and funder or insurer are now ready to agree terms.
Accepting the terms of the insurance policy or litigation funding agreement secures the means for seeing the case through to trial, if needed, without concerns over lack of funding, security for costs, or adverse costs for the client should the matter prove unsuccessful. Undoubtedly at this point, the client is in a stronger position thanks to the solicitor’s efforts in securing the funding arrangement. Just when it’s finally time to focus on the real work of bringing the claim… the defendants make an offer of mediation.
This scenario throws the cat amongst the pigeons. The client will no doubt be delighted, and optimistically prepare to bank their winnings. Their first instinct will probably be to naively discard the insurance offer, fling off the funding and run naked into the mediation. Indeed, they may have already felt the funding was expensive and now they feel there is no point to insuring a matter they couldn’t possibly lose.
Meanwhile, the solicitor, having seen mediations fail many times before, will be feeling less optimistic about a definite settlement at mediation. So, what is the best advice for the client?
Whilst a settlement at the mediation without funding or insurance would maximise the client’s recovery (no need to pay premiums and success fees), the odds of settling quickly may not be as high as the client thinks. Furthermore, a failed mediation would need to be reported to the insurer and funder and may mean a significant change to the terms of the offer, or indeed a complete withdrawal of the terms (placing the client in a significantly weaker position), or, in a worst-case scenario, unable to pursue the matter at all due to lack of funding for legal fees or ability to prove security for costs.
In the past, the typical approach for lawyers at this point is to do one of two things:
1) Not accept the funding offer but see if they can keep the commitment of the insurer or funder until after the outcome of the mediation is known
This is nearly always a non-starter, and most solicitors will know this even if their client instructs them to attempt it. This is especially true where negotiations have been ongoing for some time already. It is a form of “adverse selection” which means the cases that don’t settle and later need terms reinstated are, by definition, less attractive cases for an insurer or funder. The response of underwriters is usually either to refuse to reinstate or to increase the price significantly to reflect the increased risk of going to trial.
2) Approach the insurer or funder to accept the cover or funding ahead of the mediation but with a lower fee or premium in the event of settlement at mediation
It is sometimes referred to as the “booking fee” approach, so-called as it acts as a payment to “book” the capacity. The size of the fees may vary from just enough to cover the underwriter’s time assessing the case up to the point of mediation or something more akin to a heavily discounted premium. A booking fee can be difficult to orchestrate especially where there have already been intense negotiations around pricing and the offer already includes discounts for an early settlement. The underwriters will argue that the prospect of an early settlement at mediation has already been accounted for in the terms on offer.
The risk associated with losing an offer of funding or insurance needs to be measured against the following factors:
- The client’s ability to privately fund fees and security for costs were the mediation to fail.
- The existence of alternative insurers or funders who had shown real interest in the case who might be willing to replace the insurer or funder refusing to accommodate now (remembering they too could lose their appetite for the risk presented by the matter after a failed mediation).
- The realistic probability of the case settling at mediation.
- The prospects of the discounted costs of the insurance and funding being passed onto the defendant as part of a settlement proposal at the mediation.
A third approach: use insurance and funding as a negotiation tool
These days, many lawyers would adopt a third approach. They would not dream of going into mediation without the funding and insurance completely secured. They would see their client’s position in the mediation as strengthened by the backing of a funder or insurer and view the funding arrangements as an essential part of their armory going into the negotiations despite the fact it comes at a cost, as that cost would be incurred in any case, should a settlement occur outside of alternative dispute resolution.
Those lawyers who seek to engage with insurers and funders ahead of and during mediations will gain a reputation with the funding industry as good business partners. They cannot be said to be doing their client a disservice by protecting their future means of funding the case, and in fact, it can give all of their clients the best chance of a satisfactory resolution at mediations now and in the future, if they can use their reputation for fairness with funders or insurers to extract better terms and greater flexibility from the market.