Alternative litigation financing, also known simply as litigation financing, is the funding of litigation activities by entities other than the parties to a lawsuit themselves, their counsel, or other entities with a pre-existing contractual relationship with one of the parties, such as an indemnitor or a liability insurer. The third-party financer provides capital to a litigant for living expenses or legal costs, and in return takes a portion (usually ranging from 5 to 40 percent) of the litigant’s financial recovery from the lawsuit. A key component of litigation financing is that, unlike an ordinary loan, any payout to the financer is contingent on the successful outcome of the legal claim.
For attorneys and law firms, litigation financing presents a way to offer clients a contingency fee agreement without deviating significantly from its preferred financial model. Individual plaintiffs often seek litigation financing to pay for living expenses and other bills through the course of litigation. Plaintiffs also praise litigation financing because they claim that it provides greater access to justice and allows more cases to be decided on the merits (rather than by which party has the deepest pockets). Defendants and insurers, on the other hand, argue that litigation financing prolongs litigation, discourages settlement, and presents myriad professional and ethical dilemmas for lawyers and litigants.
Despite the normative debate, however, litigation financing has, since its introduction in 1997, become increasingly widespread. One leading litigation financing firm, Buford Capital, has estimated that 28 percent of law firms used litigation finance in 2015, up from 13 percent in 2013—a four-fold increase over the period. In addition, a number of courts across the United States in recent years have specifically weighed in on the use of litigation finance with approval. Accordingly, claims professionals should be cognizant of how litigation financing works and should be aware of the following:
- Because litigation financing gives litigants access to funds otherwise beyond their wherewithal, it may have the effect of prolonging litigation in a given case or discouraging a party from settlement or engaging in ADR.[1] To the extent practicable, a claims professional should obtain information as to litigation financing, either through discussions or discovery.
- There are two types of litigation financing companies: consumer and commercial. Consumer litigation finance companies typically provide funds for living expenses to individual plaintiffs; commercial litigation finance companies often finance litigation activities directly (taking depositions, calling expert witnesses, etc.). Despite the type of financing, there is a concern as to whether the direct financing of litigation expenses will lead to protracted litigation. To the extent practicable, information with respect to the...
