The $13.5 billion litigation finance industry is getting new competition from the insurance sector, which offers law firms alternative tools to pay for legal actions and poaches talent from traditional funders.
Brokers have spotted multiple ways to become a part of the legal finance ecosystem by offering products that work in tandem with litigation funding and at times in lieu of it. In some instances, funders haven’t been able to compete with insurers’ policies, said Stephen Kyriacou, managing director and senior lawyer for Aon Plc’s litigation risk group.
Insurance has essentially “killed” the role of litigation funders in cases that have been decided in a lower court by offering judgment preservation insurance, Kyriacou said. “Funders have started to kind of cede that ground to us and focus on other avenues,” he added.
Insurance brokers such as Aon, CAC Specialty and Willis Towers Watson Plc are invading the space of litigation finance companies as the asset class has grown in popularity since its infancy a decade ago. In litigation finance, investors pay the cost of a lawsuit—or for a portfolio of lawsuits—in return for a portion of the award in successful cases.
Insurers since 2019 have accelerated their offerings of judgment preservation insurance, a policy that guarantees a portion of an award. In the last year they have also expanded into providing policies to law firms for an entire docket of cases.
The development of what is known as insurance-backed legal finance involves covering all of a law firm’s out-of-pocket costs, and a percentage of the legal fees, on a case or portfolio of cases. The law firm or client could then approach a capital provider and offer the underlying litigation and the insurance policy as collateral.
“It’s attractive to law firms and their clients because it’s cheaper capital,” said Bob Koneck, senior vice president at insurance broker Atlantic Global Risk. “It’s a more economical way for them to finance their litigation.”
There’s a large untapped market for insurance-backed legal finance, and once there’s awareness of the product, more lawyers will begin to use it, he said. “There could soon come a time when insurance disrupts a meaningful portion of the legal finance market,” Koneck said.
Brain Drain
Insurers’ invasion has led to talent leaving litigation finance. Koneck, for instance, was a director for the litigation funder Woodsford. He began working at Atlantic Global Risk in September.
Megan Easley, senior vice president of contingent risk solutions at CAC Specialty, worked as legal counsel for funder Omni Bridgeway until last year. Insurance “offers more tools and more ways to create good outcomes for clients,” she said.
Jason Bertoldi, head of contingent risk solutions at Willis Towers Watson, moved into insurance after nearly three years inlitigation finance at investment management firm D.E. Shaw. Bertoldi said that insurance is in growth mode and becoming more prominent.
“There’s been a noted influx of really talented people who are entering the space,” he said. “That’s going to continue to happen.”
Daniel Bond, executive vice president of contingent legal risk at DUAL North America, said the litigation finance market was becoming saturated and he wanted to explore other areas.
Litigation funding “continues to be a very attractive asset class,” said Bond, who left funder Delta Capital last year. “I do think that you’re starting to see obviously a little bit of consolidation and retrenchment in terms of how many funders there are and of what size.”
If funders want to compete with insurance, they’ll have to lower some prices, said Daniela Raz, previously an investment manager at Omni Bridgeway and now the senior vice president of the contingent liability practice at insurance broker Marsh.
“There is tremendous opportunity for creative structures that can either complement or serve as compelling alternatives to other risk-management solutions such as litigation funding,” Raz said.
This year, an uncertain economy and an influx of new funders competing in litigation finance led to a difficult fundraising environment, contraction, portfolio selloffs and layoffs.
Encroachment
Still, while the insurers have ramped up activity, litigation funders said they have yet to feel overrun by the invaders. “That’s always been something people are concerned about, it just hasn’t happened,” said Cesar Bello, research and portfolio manager at Corbin Capital Partners.
Litigation funders still take up a large portion of the market and are typically more willing to fund early-stage cases than insurance companies, Bello said. Insurers ultimately “don’t want to really be in that business in a dedicated way, given what the other side of the house often is insuring,” he said.
Michael Rozen, founder and co-managing partner of TRGP Capital, said that when his company backs law firms, “we are generally an ‘equity’ participant rather than debt. Thus, I don’t see competition from this insurance product.”
David Perla, co-chief operating officer of Burford Capital, said his firm views insurers “as adjacent to us, less so than competition.”
Litigation funders have criticized insurers’ past statements about the business. Last year the Insurance Information Institute, an industry association, published a report detailing why insurers and policy holders should be concerned about litigation funding and advocated for disclosure.
In the report, litigation funding is described as a “moral hazard” and as being “no longer about David vs. Goliath, but about speculative investors getting richer as they focus on cases more likely to win the big settlements.”
Meanwhile, the insurers have been getting exposure in litigation finance both on the defense and plaintiff sides, Perla said. “I think that sort of deprives them of the ability to be entirely holier-than-thou about whether it’s a valid enterprise,” he said.
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