Litigation Finance Explained

Litigation finance for commercial cases can be invaluable to claimants pursuing damages in a business dispute. It minimises financial risk, allows smaller businesses to pursue claims against larger companies and keeps legal expenses as an off-balance sheet cost. However, most people are unaware of the options available to them.

Firstly, it should be explained that litigation finance is made up of two distinct elements which can be taken individually or together depending on the needs of your case. These are:

  • After The Event (ATE) insurance
  • Litigation funding

The UK’s leading litigation finance broker TheJudge defines ATE insurance as a policy where an insurer “provides an indemnity for legal costs in the event that a claimant loses a piece of litigation or arbitration.” In other words, ATE insurance offers a safety net against an adverse outcome by covering your legal costs.

Traditional insurance policies are taken out in advance to cover insured parties against the unknown. However, ATE insurance is only available to those who are already involved in or considering a legal claim. ATE insurers will typically only offer a policy to those cases where they consider the case is likely to be successful; usually a case will need to be considered to have at least 60% chance of success in order to obtain offers of insurance.

ATE insurance can be taken out as a standalone product or combined with a litigation funding agreement. Litigation funding, also known as third party funding, is ideal for claimants who might not have the resources to pay all their legal fees and disbursements on an ongoing basis. A funding company finances the legal fees and disbursements of the case in exchange for a success fee (typically a set proportion of the damages awarded). In the event that the case is unsuccessful, no fee is payable to the funder and the money does not need to be repaid by the claimant.

Litigation funding ensures a smooth and reliable cash flow for legal fees throughout the duration of the case and minimises financial risk to the claimant. Both funding and insurance should be considered by any business looking to embark in commercial litigation and can be available for cases where the expected costs are likely to be anywhere between £50,000 and into the millions.

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