The judgment in Davey v Money and others will have come as a disappointment to the litigation funding community. After all, the “Arkin option” doesn’t have the same ring of certainty as the “Arkin cap”. But should a party providing the means for a claim to be brought in return for commercial gain really be surprised that they should be exposed to the full costs incurred by the opponent if the claimant doesn’t meet those costs?
I don’t propose to provide a detailed breakdown of the Davey judgment in this blog, save to say that the court held that the unsuccessful claimant’s litigation funder should be liable for the full adverse costs incurred after the funding agreement was signed, rather than taking the historic approach of capping the funder’s exposure at the amount of funds invested in the claim.
The obvious point to take from Snowdon J’s decision to treat the Arkin cap as an option rather than the rule is that funders are more likely to insist that the claimant obtains appropriate adverse costs insurance as a pre-requisite to their funding agreement. But then many funders already took this stance prior to the Davey judgment. Such funders saw the original Arkin decision less as a cushion between them and the adverse costs risk but quite the reverse, the recognition that they can expect non-party costs orders where they support losing claims in a new world where professional third-party funding is a credible industry to support access to justice. For these funders, the Davey judgment should have little practical effect.
Others will not have been so cautious, however, and will likely be keen to ensure adverse costs cover is in place going forward. Some may find themselves in the unfortunate position of having a back book of claims for which adverse costs insurance may not be available (for instance, if the prospects of the case succeeding have decreased since the funding arrangement was put in place). It will be interesting to see if and how the Davey judgment affects funder behaviour in such cases.
Whilst in some circumstances a funder might be willing to offer an adverse costs indemnity alongside a litigation funding arrangement, such deals require substantial commitments, often more than doubling the funder’s overall exposure. Putting cash aside in this way will rarely amount to an efficient use of a funder’s capital and, as a result, third-party funding is prevented from being a holistic solution for smaller cases without adverse costs insurers willing to assume at least some of the risk.
Litigation funding and adverse costs insurance are very distinct products, usually offered by different providers. However, it is reasonably common for a funder to play a role in arranging the client’s adverse costs insurance as part of a package arrangement. Some funders will do so by referring the case to a broker, such as TheJudge, who will source and structure the most appropriate product for the client. Other funders will have relationships with preferred insurers to whom they will refer the client. Whilst it may be convenient for the litigation funder to assist in this way, there are some important points that the lawyer should bear in mind when taking this approach.
Having the funder assist with the adverse costs policy will not absolve the lawyer of their duties under the Solicitors Regulatory Authority (SRA) Code of Conduct.
It is important to remember that insurance is a regulated industry and litigation funding is not. If the funder has referred the client to an adverse costs insurer, the client’s lawyer may take the view that they are absolved of any responsibility with regard to the arrangement of the insurance. Most funders, however, are not Financial Conduct Authority (FCA) regulated to arrange a contract of insurance, nor are they able to hold the exempt professional firm status that applies to registered law firms. It still falls to the lawyer to ensure that the client is in an informed position with regard to how it will pay its legal fees. They will still need to pay close attention to the obligations imposed by the Insurance Distribution Directive, as incorporated into the SRA Code of Conduct.
Even with a funder involved, the adverse costs insurer is likely to require the law firm to act as a conduit for information between the insurer and the client and will, at the very least, require the law firm’s involvement in establishing the prospects of success and the amount of cover required. The lawyer is, therefore, unlikely to be able to absolve themselves of any responsibility purely by allowing the funder to source the insurance. The penalties for non-compliance of the obligations imposed in the SRA Code of Conduct are severe and can include a claim for professional negligence, lasting reputational damage and, in some circumstances, criminal sanctions.
- It is vital that the adverse costs insurance policy meets the demands and needs of the client. This is so even if it is being obtained predominantly to give comfort to the litigation funder as a prerequisite to the litigation funding arrangement.
- The client needs to be aware that more appropriate products might be available. Specifically, the client needs to understand that the funding and insurance products can be purchased separately, along with the differences in the terms available and any changes to the price.
For example, if the arrangement involves a referral to the funder’s preferred adverse costs insurer, the client needs to be made aware of the following:
- More competitive terms may be available if they search the market.
- A specialist broker will search the market at no additional cost to the client.
- If the arrangement involves the funder paying all or part of the premium on an upfront basis, the client should understand that:
- a deferred and contingent premium may be available from the same or other providers;
- the upfront element of the premium will be added to their loan and will be subjected to the agreed success fee on any sum advanced for the premium (that is, the true cost at the end is compounded); and
- whilst a deferred and contingent premium may be slightly higher than an upfront premium, the client needs to be put in an informed position to compare the difference in price between the upfront premium with resulting success fee and the cost of the deferred and contingent premium.
Will the Davey decision impact the price of litigation funding?
It’s easy to assume that the overall cost of a litigation funding arrangement could increase because the funder is more likely to insist that the client also purchases an adverse costs insurance policy as part of the deal. The client will have to incur the cost of this policy (although a deferred and contingent premium is likely to be available) and, if the premium is funded by the funder, they will also have to pay an increased success fee. Having said this, the judgment should not lead to an increase in the overall cost of funding agreements with funders that already encouraged or insisted upon the client obtaining an adverse costs insurance policy prior to the Davey judgment.
I have read articles that suggest that the Davey decision may make adverse costs insurance more expensive, but I do not believe this will be the case. The after the event (ATE) insurance market suffers from adverse selection. An inevitable consequence of the nature of the product means that claimants often only seek to obtain adverse costs insurance for cases in which there is a significant risk of losing. Yet the premiums are often deferred and contingent upon success and, therefore, insurers are only paid in the event of a win. Funding, on the other hand, is typically sought for good cases being brought by claimants with a need for cash flow assistance. If funders take the view that adverse costs insurance is effectively mandatory for cases where costs follow the event, insurers will see more and arguably better cases to balance against those that have a significant risk of losing. As with all insurance, a greater spread of risk leads to cheaper premiums.
Beyond the degradation of the Arkin protection, the Davey case highlights the symbiotic relationship between litigation funding and ATE insurance and provides a platform that will hopefully lead to increased transparency, a better understanding of the mechanics of such arrangements and a greater level of responsibility to ensure that the client receives the best possible advice. It is in the legal community’s collective interest to ensure that the litigation funding and ATE insurance markets continue to develop in a sustainable and credible manner. In understanding how funders and insurers operate and what “good” practices look like, we can all help to police any “bad” practices. This is even more important given the unregulated nature of the litigation funding market.