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Becoming the appointed liquidator of a business that has pending litigation poses both opportunity and risk. With the right legal team, that pending litigation becomes a viable asset that an IP is duty bound to pursue, however the potential rewards inevitably come with risk. The risk of personal liability of having to pay adverse costs is a significant and genuine risk for insolvency practitioners. Most IPs will be familiar with the availability of adverse costs insurance for such matters and feel fairly confident that it sufficiently hedges their risk. However, many IPs may not have considered the policy coverage and how it responds, or fails to respond to potential scenarios in the litigation. Furthermore, when you add a third party funding agreement to finance own fees into the mix what should be a comprehensive finance package may actually leave some potentially hazardous ambiguities which could result in personal exposure for the IP. There are a number of issues that should be considered when arranging litigation finance, here we’ve highlighted a few areas which can become troublesome for IP’s

1. Discontinue due to lack of funding – no adverse cost protection

ATE insurers will not generally pay any adverse costs should a case discontinue for lack of financing. If the case is being funded by a third party funder the IP will need to be confident that the funder is fully committing to seeing the case through and cannot easily just abandon the case. If the funder ceases funding and the case collapses, despite the prospects remaining good, then it’s likely that most insurers would seek to avoid any liability for adverse costs. Insurers will say they are there to remove the litigation risk of the case losing not the credit risk of the client’s ability to finance their own legal fees.

2. Multiple defendants.

Believe it or not there are a number of ATE carriers whose standard policies wording still fail to provide an adequate solution to a split outcome for a multiple defendant case. Where an IP has a net liability to pay adverse costs (i.e. to the successful defendant) then they won’t be well-served by a policy that defines a win against one defendant as a win against all and will not pay a claim regardless of negative net outcome.

3. Relying on the evidence of the company’s previous management

When bringing a claim in the name of a company in liquidation it may well be the case that you require evidence to be provided by former personnel of the company. Take a scenario where the case gets to trial and under cross examination it becomes evident that some of the evidence by the former MD has been fabricated. In this scenario the IP will want to be confident the insurer is not going to try and avoid liability due to a breach of warranty or condition precedent. While policy voidances are rare they can and do happen on occasion. Citing the benefit of the wider relationship between the IP and insurer may be of little solace to the underwriter who has to explain to his boss why they are potentially liable to write a multimillion pound cheque for adverse costs. Add into the mix the potential that a given insurer might be in a run off position by the time a case reaches trial in 2 or 3 years and the incentive to be commercial might have completely dissipated. Any fee earner who has made a claim with a run-off insurer will know it’s often far from a straightforward process. The past 4 years have seen a number of exits from the market and you can always been certain that as new insurers come into a market there will also be additional exits.

4. Can an instructed law firm be too close to a given insurer or funder?

A lawyer is duty bound to protect the interests of the client. However, with fee earners under pressure to hit billing targets there is also a pressure to get cases up and running as soon as they can. While this need not come at the expense of independence, there is a risk that complacency can set in, particularly if there is a perceived relationship with a given funder or insurer. Look at any industry and you’ll see that loyal customers don’t necessarily get the best deal, it’s often the new clients who get the best deals. It may be that new clients are more willing to take a harder line in negotiations or it may well be that funders and insurers are more willing to go the extra mile to secure business from a new source. Unfortunately we have seen many examples of bad practice in the past, where lawyers have become oblivious to the questions they ought to be asking or the terms they ought to be negotiating for their clients.

Of course there are ways of mitigating or removing all of these risks and a host of others not discussed above. The key issue is to be alive to the fact that price is not the only determinant when considering providers. Everyone is friends at the outset of a deal, but that can all change very quickly if there is a divergence of interests between the parties.

The larger the case the greater the potential risks involved for the IP when considering their funding and ATE arrangements. At TheJudge we pride ourselves on delivering what we hope is first class advice, and with 15 years of experience behind us, and access to all the leading ATE insurers and litigation funding companies (including exclusive markets), we believe that engaging us to source your funding/insurance is a sound first step to ensure a third party is helping to protect your interests.

Have a case in need of funding or insurance?

Please contact Matthew Amey (matthew.amey@thejudge.co.uk) or Rebekah Weiler(Rebekah.Weiler@thejudge.co.uk ) to discuss your requirements: Tel (0)845 257 6058