Third-party funding of high-stakes litigation can typically make the distinction between litigating the case or strolling away. The monetary association typically makes good sense, with buyers serving to to facilitate the pursuit of bona fide claims that may in any other case be forgone in trade for a bit of the restoration. Insurance coverage protection disputes match this mannequin effectively, since these claims usually contain an insured who has already suffered some monetary or different hardship and an insurance coverage firm with deep sources that refuses to pay the declare. It ought to come as little shock, subsequently, that the Insurance coverage Companies Workplace (ISO), an advisory and ranking group for the property/casualty insurance coverage trade, not too long ago accredited a brand new endorsement that requires disclosure of third-party litigation funding agreements. The approval comes as courts and state legislatures step up calls for for transparency in funding to curtail affect that funders might have over litigation technique.
The Endorsement
The endorsement, drafted as a modification of a number of traces of business legal responsibility insurance coverage, together with CGL, operates so as to add a brand new situation to the coverage. The endorsement gives, in pertinent half:
A. The next is added to the Circumstances part:
Litigation Funding Mutual Disclosure
If we and an insured don’t agree whether or not or to what extent a declare or “swimsuit” is roofed by this Coverage, both get together might make a written demand for mutual disclosure of any “third-party litigation funding settlement(s)” concerning that declare or “swimsuit”.
When this demand is made, every get together should disclose in writing inside 30 days whether or not they or their legal professional(s) have executed any “third-party litigation funding settlement(s)”. If a celebration or their legal professional(s) have executed any “third-party
litigation funding settlement(s)”, the written disclosure should embody:
a. A replica of such “third-party litigation funding settlement(s)”;
b. The names of every individual or group who has entered into such “third-party litigation funding settlement(s)”;
c. Whether or not such individual or group is required to approve of or be consulted on litigation or settlement selections, and if that’s the case, the character of the phrases and situations regarding that approval or session; and A short description of the monetary curiosity of any individual or group who supplied such funding.
Every get together should present to the opposite get together a duplicate of any replace of their written disclosure inside 30 days of:
a. Any change within the above info in Paragraphs by means of d.; or
b. When the events or their legal professional(s) have executed any “third-party litigation funding settlement(s)” after the preliminary demand.
The endorsement additionally goes on so as to add a definition of “Third-party litigation funding settlement” that broadly contains any settlement to supply litigation funding to a celebration or its attorneys.
Thus, in sum, the endorsement makes it a situation of protection that the insured disclose all funding agreements that pertain to the topic declare or lawsuit upon request by the insurer, even the place the funding settlement belongs to counsel.
The Potential Issues
1. Situation of Protection.
Quite than add the disclosure requirement as a post-loss obligation that the insurer would possibly invoke in sure instances, the disclosure is added as a situation to protection, which means {that a} failure to fulfill that situation might jeopardize protection below the coverage with out regard to a specific declare. It likewise probably affords the insurer a treatment of coverage rescission, which carries far more extreme penalty than odd breach.
2. Unilateral, Not Mutual.
The endorsement purports to require a mutual disclosure that may be invoked by a request from both the insurer or the policyholder. To name the disclosure mutual is facially misleading. First, insurers don’t use litigation funding, and definitely not on any common foundation. Thus, it’s extremely unlikely that an insurer is ever going to have a litigation funding settlement to reveal. And why wouldn’t it? The insurer has deep sources, so there is no such thing as a motive for an insurer to require monetary backing and no motive to share a considerable portion of any restoration with a litigation funder. Second, when an insurer is defending below a reservation of rights, the insurer is funding the protection. The insured would by no means have funding to reveal. Certainly, the litigation funding mannequin doesn’t work the place the insured is the legal responsibility defendant, since there can’t be a restoration from which any funder might recoup its funding, a lot much less a multiplier on its deployed capital. Thus, since funding would nearly by no means be a problem with regard to protection of the underlying declare, the disclosure should be geared towards protection litigation, the place the insurer is litigating with its insured over monies that the insurer holds, and the insured is preventing to get well. This results in the endorsement’s overbreadth, amongst different issues.
3. Potential Overbreadth and Conflicts.
The endorsement is also grossly overbroad. The endorsement requires the disclosure of “any” funding settlement that issues the declare or swimsuit. Such broad wording would come with each the underlying litigation and any subsequent associated protection litigation. Nevertheless, though the endorsement purports to embody the underlying litigation that has led to protection, there would by no means be a necessity for funding in reference to that litigation since it’s upon the insurer to defend in step with its reservation of rights that could be a prerequisite to any disclosure.
Moreover, the disclosure obligation extends past the policyholder and its insurers to incorporate policyholder counsel. That is problematic on a number of ranges. In nearly all situations, counsel aren’t a celebration to the insurance coverage coverage and, thus, by no means agreed to be contractually sure by the phrases and situations of protection. But a failure to abide might jeopardize protection for its shopper. This presents a battle of curiosity between the policyholder and its attorneys the place the attorneys are unwilling or unable to reveal their counsel-side or portfolio-level funding. It likewise places counsel in a Catch-22, the place it doesn’t matter what counsel chooses to do, it is going to both violate the situation to protection or violate its personal settlement to maintain its funding settlement confidential.
4. Discovery Implications.
The endorsement can also have discovery implications. For instance, courts in Delaware and New Jersey allow additional discovery about funders provided that the requesting get together demonstrates good trigger or reveals the funder has authority over litigation selections. In jurisdictions with related guidelines, required disclosures might expedite expanded discovery as insurers may be anticipated to wish to absolutely perceive the monetary backing of its adversary in any important litigation. Conversely, in jurisdictions that don’t ordinarily allow funder discovery, the brand new funder disclosure endorsement might open the door to funder discovery because the funding agreements will change into a part of the evidentiary file upon a disclosure demand below the coverage.
***
At backside, as litigation funding continues to evolve, coverage endorsements mandating the disclosure of litigation funding agreements stand to play a essential and probably disruptive function in protection litigation by, amongst different issues, probably forcing a battle between the policyholder and its protection counsel the place the legislation agency has engaged in a counsel-side funding settlement that it was not required to speak in confidence to its shopper.