What Labour’s victory means for litigation funding in insurance

The introduction of a new Labour government often heralds a period of legislative review and potential reform, which can affect various sectors, including litigation funding. 

However, one omission from the Labour Manifesto and indeed, the King’s Speech, was the Litigation Funding Agreements (Enforceability) Bill.

The evolution of litigation funding and insurance options reflects a market response to the need for risk management in commercial disputes, which is a critical concern for the insurance industry.

For anyone with even a passing interest in the financing of litigation, the PACCAR decision by the UK Supreme Court – formally known as R (on the application of PACCAR Inc and others) v Competition Appeal Tribunal and others [2023] UKSC 28 – was a significant ruling that affected the enforceability of litigation funding agreements.

The court determined that LFAs, which allow funders to receive a percentage of any damages recovered, to be damages-based agreements and thus subject to strict regulatory compliance to be enforceable. 

The LFA in the PACCAR case, like many LFAs executed in the UK, was not compliant with the DBA regulations and was thus unenforceable.

The PACCAR decision was the culmination of a series of unconnected public policy decisions of legislation, stretching back over 20 years. 

The implementation of the Access to Justice Act in 2001, which allowed claimants to recover the Conditional Fee Agreement success fees, as well as after the event premiums from the counter-party, became the catalyst not only for a proliferation of personal injury claims with a consequent increase in the cost of those claims, but also the proliferation of unregulated claims management companies.   

Legislation passed in 2006, the Compensation Act, which sought to regulate the activities of claims management companies, included a definition of claims management services which itself includes providing financial assistance. 

Fast forward 18 years and this definition proved to be the undoing of the funder in PACCAR.

This decision had profound implications for UK litigation funders and claimant law firms relying on third-party funding. 

In response to the challenges posed by the PACCAR decision, the UK government introduced the Draft Bill in March 2024 with the aim of reversing PACCAR and making it clear that LFAs are not DBAs. 

Draft

However, the Draft Bill did not pass before the dissolving of Parliament, and thus remains on the books in draft only.

The importance of understanding litigation funding within the insurance industry cannot be overstated. 

Litigation funding options, such as after the event insurance, play a crucial role in managing the financial risks associated with legal disputes. 

For insurers, this means being able to offer products that mitigate the costs of litigation for their clients, while also assessing the viability of claims and the likelihood of success. 

The evolution of litigation funding and insurance options reflects a market response to the need for risk management in commercial disputes, which is a critical concern for the insurance industry.

Given the ongoing uncertainty in the funding market, the opportunities for insurers are considerable. 

Uncertainty always creates risk and risk provides opportunity. Specialist brokers are already offering “own costs cover”, an extension of ATE, which can be used by litigants and law firms as a cheaper form of litigation funding.  

Either the law firm agrees to carry the work in progress – knowing they will get paid win or lose at the end, usually with a ratchet success fee – or the insurance policy is used to obtain funding at a cost lower than that which can be offered by traditional funders.

Of course, for the insurance industry, ease of finance for bringing litigation is a double-edged sword but in times of uncertainly, the brave flourish and the cautious buy insurance.