The $13.5 billion litigation finance industry is facing new competition from the insurance sector, which provides law firms with alternative financing options for legal actions and attracts talent from traditional funders.
Brokers have identified various ways to integrate into the legal finance ecosystem, offering products that complement or substitute for litigation funding. In some cases, funders have been unable to keep up with insurers’ policies, according to Stephen Kyriacou, managing director and senior lawyer for Aon Plc’s litigation risk group.
Some insurance companies have essentially replaced litigation funders by offering judgment preservation insurance, effectively eliminating the need for funders in cases decided in lower courts. This shift has forced funders to focus on other avenues, Kyriacou added.
Insurance brokers such as Aon, CAC Specialty, and Willis Towers Watson Plc are encroaching on the turf of litigation finance companies as the asset class has gained popularity over the past decade. In litigation finance, investors finance the cost of a lawsuit or a portfolio of lawsuits in exchange for a share of the award in successful cases.
Since 2019, insurers have expanded their offerings to include judgment preservation insurance and policies for entire dockets of cases. This has given rise to what is known as insurance-backed legal finance, which covers a law firm’s out-of-pocket costs and a percentage of the legal fees for a case or portfolio of cases. The law firm or client can then use the underlying litigation and the insurance policy as collateral when approaching a capital provider.
According to Bob Koneck, senior vice president at insurance broker Atlantic Global Risk, insurance-backed legal finance appeals to law firms and their clients because it provides cheaper capital for financing litigation. There is a substantial untapped market for this type of financing, with more lawyers expected to adopt it once they become aware of the product.
Brain Drain
The invasion of insurers into the legal finance industry has led to a talent exodus from traditional litigation funders. Professionals such as Megan Easley, Jason Bertoldi, and Daniel Bond have transitioned from litigation finance to insurance, attracted by the diverse tools and outcomes that insurance offers.
These moves have left some in the litigation finance industry concerned about talent retention, as they continue to witness an influx of skilled individuals entering the insurance space to capitalize on its growth potential.
Meanwhile, Daniela Raz, who has transitioned from an investment manager at Omni Bridgeway to the senior vice president of the contingent liability practice at insurance broker Marsh, believes there is significant potential for creative structures in the insurance market to complement or serve as alternatives to litigation funding for risk management.
This year, an uncertain economy and competition in the litigation finance space have resulted in challenging conditions, leading to contraction, portfolio selloffs, and layoffs for some funders. However, traditional litigation funders such as Cesar Bello, Michael Rozen, and David Perla feel that they have yet to be severely impacted by the encroachment of insurers.
Additionally, some funders have criticized the insurance industry’s stance on litigation funding, citing past statements and reports that have been critical of the business. However, the increased involvement of insurers in litigation finance on both the defense and plaintiff sides has prompted some to reevaluate their perspectives on the industry.