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Home / Insurance / Triple-I Blog | Trial financing and social inflation: What is the connection?

Triple-I Blog | Trial financing and social inflation: What is the connection?



Second post in a series on social inflation and legal financing

Trial financing ̵

1; where third parties bear all or part of the cost of a court exchange for an agreed share of the settlement – is often contributing to social inflation. But, like so much else associated with social inflation, it is unclear how widespread the practice is.

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With historical roots in Australia and the UK, investor sentiment financing has taken hold in the United States in recent years. On the plus side, it allows litigants to hire experts to develop effective strategies – alternatives that were once only available to large corporate respondents.

But it can also contribute to litigation based more on investors' expectations than on the plaintiff's best interests. .

Erosion of Community Prohibition

Trial financing was once generally prohibited. The relevant jurisprudence – called "champerty" or "maintenance" – originated in France and arrived in the United States by common British law. The original purpose of the champerty ban – according to an analysis by Steptoe, an international law firm – was to prevent financial speculation in lawsuits, and it was rooted in a general distrust of disputes and lending of money.

There is an irony here, in that a great social force that drives social inflation today – distrust of companies and litigation – once justified the ban on a practice that is now very much associated with the phenomenon. 19659006] "If you're trying to understand how we got here, I would say start in the 1990s," says Victoria Shannon Sahani, professor of law at Arizona State University Sandra Day O & # 39; Connor College of Law. "The United States is not really a big player on the scene yet, but you have Australia and the United Kingdom independently taken steps in their legislation that paved the way for legal remedies to become more widespread."

Between 1992 and 2006, Sahani said, "It was a kind of wild west in Australian law in the sense that if you engaged in legal funding, you always risked your contract being called into question."

In 2006, the High Court of Australia clarified that legal funding was allowed in jurisdictions that had abolished maintenance and championships such as crime and damages. It was even acceptable for a financier to influence important case decisions.

The exercise took time to gain traction in the United States as power bans are handed over to states. Some have abandoned their championships for the past two decades. Some, such as New York, have adopted "safe havens" that exclude transactions over a certain amount of dollars from the scope of championship laws.

"Given that the efforts involve in many cases, it will be interesting to see if dispute financiers refrain from direct interference."

– David Corum, Vice President, Insurance Research Council

Uncertainty about market size

There is no consensus on how much investors spend on U.S. lawsuits each year, according to the Bloomberg Act, "but it is not $ 85 billion, a number recently presented as an" addressable market "for the legal financing of a listed dispute financier. "

This is because the industry only spent about 2.7% of $ 85 billion during a According to a survey by Westfleet Advisors, which began in mid-2018. Bloomberg Law asks. niche product that most plaintiffs and lawyers think is unnecessary? "

An important decisive factor for growth may be the financiers' willingness to remain uninvolved in handling cases, says David Corum, vice chairman of the Insurance Research Council:" Given the efforts in many cases it will be interesting to see if dispute financiers refrain from direct interference. "

Benefit, path or both?

While financiers talk the "David vs. Goliath" aspect to help small claims against companies, opponents worry about introducing profit in a process that is supposed to

Laura Lazarczyk, Vice President and General Counsel of Zurich North America. , called disputes for financing "offensive" and said that damage "will largely be borne by insurers in insurance costs and damages payments and by policyholders in nasty losses and higher premiums.

Critics also explain the lack of transparency. While the U.S. District Court of New Jersey held that third-party financing must be disclosed, attempts to approve public legislation on disclosure have failed.

"It is a multibillion-dollar industry with no regulation and no transparency requirements," said page C. Faulk, senior vice president of legal reform initiatives at the U.S. Chamber of Commerce. "It's basically turning our American courtrooms into casinos, which is why the House is calling for disclosure."

Such concerns led the American Bar Association last year to approve best practices for companies that engage in litigation. The resolution is silent on disclosure, but it urges lawyers to be prepared for review. It also warns them to advise financiers on the merits of a case, and warns that this may raise concerns about the waiver of lawyer-client privileges and expose lawyers to claims that they have an obligation to update this guidance as disputes develop.

Previous in the series

Social inflation: Eat the elephant in the room

More from the Triple-I blog

What is social inflation? What can insurers do about it?

Trial funding increases when ban on ordinary laws is eroded by courts

The Bar Group approves best practices for guiding legal funding

Social inflation and COVID-19

IRC study: Social inflation is real, and it hurts consumers , companies

Florida dropped from 2020 "Judicial Hellholes" list

Florida's AOB crisis: A social inflation microcosm


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