Litigation funding spotlight in Ireland - the insurance dimension

The Law Reform Commission (LRC) has very recently published a lengthy consultation paper on legalisation and regulation of third-party litigation funding (TPLF) in Ireland.

This follows hot on the heels of new legislation removing the restrictions on third-party funding of international commercial arbitration in Ireland. See our recent article on that development here.

Synopsis

In short, the LRC identifies:

  • three potential means of legalising TPLF, and
  • five possible models for regulating TPLF (if legalised).

What’s TPLF?

TPLF is an arrangement under which a third party (with no prior connection to the litigation) funds or provides material supports to finance that litigation.

This is normally done in return for a portion of any proceeds the funded litigant recovers following settlement or an award of damages.

Context and background

With limited exceptions, TPLF has long been illegal in Ireland. 

This is due to long-standing common law rules against maintenance (funding of litigation by unconnected third parties) and champerty (such funding with a view to profit sharing).

This position was reaffirmed in relatively recent case law (Persona Digital Telephony Ltd & anor v. Minister for Public Enterprise & ors [2017] IESC 27) which also highlighted that any change to the position must be driven by the legislature.

While the Courts and Civil Law (Miscellaneous Provisions) Act 2023 addressed third party funding in the context of international commercial arbitration, the matter of litigation funding remains unchanged.

Taking into account the impetus to limit social inflation and ensure affordability of financial services products (including insurance), the debate on the issue of TPLF is a topical and interesting one.

Global trend?

TPLF is gaining significant traction in the global insurance market.

The current approach in Ireland differs from the position reported in certain other common law jurisdictions where TPLF, while largely unregulated, is increasingly popular.

The LRC illustrates this by referring to the 2021 analysis of the TPLF sector conducted by the European Parliamentary Research Service.  This estimated the global TPLF market as generating nearly €10bn in revenue internationally.  Interestingly, the LRC mentions other estimates which indicate that the figure could be much higher (between €40bn and €80bn).

Reports suggest that the popularity of TPLF is becoming increasingly apparent in common law jurisdictions such as the UK, Australia, Germany and the United States.  In particular, lines of insurance business including environmental, cyber litigation, directors’ and officers’ liability as well as commercial auto insurance may be attractive interest areas for litigation funders.

Aim of the paper

The LRC is not, at this stage, recommending any one course of action over another.

Instead, the consultation is an input-gathering exercise focused on a range of options identified by the LRC for potential legalisation and regulation in Ireland.

The goal of the LRC is to "inform debate and stimulate discussion, which, it is hoped, will generate responses from all interests and perspectives that will enable the [LRC] to move to a final report setting out its recommendations".

Key considerations for the insurance sector

Legalisation and regulation of TPLF could have significant implications for the insurance sector.

Key among these are impacts on:

  • underwriters of liability risk and other products (whether insuring businesses or, indeed, litigation funders)
  • insurance sector firms as potential defendants of TPLF-supported litigation
  • claims management and analysis (as well as other operational matters)
  • litigation strategies, and
  • product offerings.

Some potential opportunities for the insurance sector include:

  • Use of funding as a tool or support in subrogated claims scenarios (where insurers step into the shoes of policyholders for litigation purposes).
  • Use of data analytics, artificial intelligence and other technology similar to that utilised by litigation funders in analysis and decision-making on claims (in order to assess and mitigate exposure areas). The LRC notes that specialist litigation funders refuse most of the funding requests they receive, with overall industry rejection rates stated to be as high as 90%.
  • Potential for new products/coverage such as litigation funding insurance (meaning coverage for litigation funders against the risk of losing their investment in the event of an adverse verdict).

Knock-on impacts of TPLF

In providing views to the LRC, interested parties may be mindful of the wider impact of TPLF.

This includes TPLF as a contributing factor to social inflation (ultimately leading to higher insurance-related costs).

Reasons for this include the following (which are widely recognised as potential risks and are alluded to by the LRC):

  • increased litigation
  • prolonged legal proceedings (and connected costs and other factors that are difficult to forecast)
  • exceptionally high or so-called nuclear verdicts and higher settlements
  • increased defence costs, and
  • increased coverages and costs of insurance.

Three options for legalisation

The LRC identifies three potential means of legalising TPLF.

Those three options are:

  • A “statutory exception” approach. This is highlighted as the optimum approach by the LRC and would involve preserving the torts and offences of maintenance and champerty but providing for specific exception(s) for TPLF.
  • A “preservation” approach. This would entail the abolition of the torts and offences of maintenance and champerty while preserving the rules of public policy behind the torts and offences.
  • An “abolition” approach. This would abolish of the torts and offences of maintenance and champerty outright.

Five options for regulation

The LRC identifies five possible regulatory models for TPLF (if legalised) in Ireland.

Notably, the LRC comments that any regulatory framework chosen is likely to be a hybrid one, incorporating different aspects of the following models:

  • Voluntary self-regulation - third-party funding sector in control of regulating itself.
  • Enforced self-regulation - supervisory role by the Irish State (with powers of intervention).
  • Court certification model - based on reasonableness and fairness of the third-party funding agreement.
  • Licensing regime and existing regulator - for example, administered by Central Bank of Ireland.
  • Licensing regime and new regulator - specialist regulator established specifically for this purpose.

Some interesting observations from the LRC include that, regardless of regulatory model, certification is likely to be required (e.g. from a court for class actions or from a non-court statutory body in other cases).

Additionally, the LRC comments that a mix of primary and secondary legislation may also be needed (for example, to deal with minimum requirements for funding agreements).

The question of disclosure

One key consideration for the legislature is the opaque nature of litigation funding.

The LRC notes that, among other arguments in favour of disclosure, it would allow opposing parties (including insurers) to know the true nature of their adversaries.  It would also assist in avoiding conflicts of interest, given that use of litigation funders could be employed by both insurers and their insureds (and connected parties).

Litigation funders are typically privately owned. In most jurisdictions there is little to no regulatory oversight or information about their activities (partly due to that private status).  This lack of transparency could make it difficult for opposing parties to quantify and manage legal risks and costs. Ultimately, this can have an impact on insurance coverages and costs.

What next?

While it may be some time before we see legislation or frameworks introduced in Ireland, insurers and other interested parties should be aware of these developments and the possibility of making submissions to the LRC.

Comments are invited by the LRC by 3 November 2023.

In September 2022, the European Parliament recommended that a Directive should be considered by the European Commission with a view to establishing common minimum standards for TPLF.  As a result, this issue could see some focus at a European level in the near future.

For advice or for further information on this topic please contact James Grennan, Partner, Laura Mulleady, Partner, Sinéad Lynch, Partner, Emma Martin, Of Counsel, Scott McDonnell, Associate, or any member of the A&L Goodbody Insurance & Reinsurance team.

Date published: 1 August 2023