Voices in the insurance industry have recently called for the regulation of commercial litigation funding on the ground that it is “a key driver of social inflation.” Such calls to action lack empirical support and fail to withstand even gentle scrutiny.
Executive SummaryCountering views often expressed by property/casualty insurance organizations—notably, a recent report published by Swiss Re—Dai Wai Chin Feman, director of Commercial Litigation Strategies at Parabellum Capital, explains why commercial litigation funding is not the root of social inflation. Here, he describes the differences between consumer and commercial litigation funding, noting that commercial funders focus on areas where insurance coverage is rare. He also offers data to show that the industry is too small to materially contribute to social inflation. In his view, regulation reforms being pushed by insurers and reinsurers would increase insurance costs and prolong case durations.
In reality, commercial litigation funding does not—and cannot—meaningfully contribute to social inflation. It should be welcomed by the insurance community as a means to decrease costs and increase exposure to meritorious affirmative litigation risk.
Overview of Commercial and Consumer Litigation Funding Markets
Non-recourse litigation funding in the U.S. consists of two separate markets: commercial and consumer. Each market involves different types of legal claims, different counterparty profiles, different deal structures, different uses of funds, and, therefore, different regulatory considerations.
Commercial funding involves investment in high-value commercial claims that are predominantly business-to-business in nature. Funders finance legal spend and provide working capital at various stages of litigation, as well as help law firms manage contingency risk. Investments primarily pertain to patent, antitrust, investor-state, contract, and other commercial disputes where insurance coverage is uncommon or unavailable. The commercial underwriting process is rigorous and can take months for each individual investment. Collectability is an important consideration, particularity given the infrequency of insurance coverage. Industry data from Westfleet Advisors reflects that the average commercial investment commitment in 2020 was $7.8 million, with 56 percent of commitments made directly to law firms rather than litigants. Returns are typically expressed as multiples of invested capital or percentages of proceeds rather than interest rates.