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De-risking funding

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Conditional fee agreements have long lent themselves to volume litigation; personal injury claims; clinical negligence; portfolios of cases where a solicitor can spread the risk across a number of smaller value cases.

The inherent problem on a one off commercial case – either under a CFA or a fully contingent damages based agreement – is the huge financial downside of a loss, without a portfolio of success fees on other cases to compensate. The take-up of CFAs and DBAs for commercial cases has therefore been slow. But that may be about to change.

Commercial clients are becoming increasingly sophisticated and cost-conscious, and often want their legal advisers to share the risks and rewards of litigation, with ‘skin in the game’.

The default response by many law firms is to offer either a discount on their headline rate, or a reduced fee, rather than a full CFA. Under the latter, a solicitor foregoes, say, 50% of the fees, with the client paying 50% as the matter progresses. The contingent element becomes payable only in the event of a win, often with a success fee akin to the contingent amount. As such, the solicitor retains skin in the game, without the risk of losing everything.

As for DBAs, all fees are at risk and if the case is unsuccessful, the solicitor will not get paid. Further, if the case is successful but damages do not cover the solicitor’s work in progress, a solicitor will still lose money. So, designed to allow solicitors to hedge risk on DBA and CFA matters, a specific type of ATE policy is available: own fees cover.

Own fees cover

The policy is taken out by the solicitor and operates to cover a pre-agreed percentage of their unbilled fees or ‘work in progress’ (WIP) if the claim is unsuccessful. The percentage can vary, but typically covers around 75% of the WIP (although it can be up to 100%). The premium is deferred and self-insuring, so if the case is unsuccessful, the solicitor will receive the agreed percentage of its insured WIP while not having to meet the premium. If successful, the premium would be realised from the success fee or DBA fee due from the client. The level of premium will vary based on the risks of the case and level of cover, but is typically around 70% of the insured amount.

Example 1 – full CFA with ATE own fees cover

Estimated fees of £200,000

75% of estimated fees insured, £150,000

Deferred premium 70% of £150,000: £105,000

Case is successful, client pays £200,000 base costs plus a £200,000 success fee

Insurer is paid £105,000 premium

Solicitor bills £295,000 net

Case is unsuccessful, the solicitor is paid 75% of its WIP, £150,000

The ATE product works to hedge the risk. Had the above example been run under a traditional CFA, with a 100% success fee, the solicitor would have been paid either nil, or 200% of fees. Under example 1, the amount is either 75%, a 25% reduction, or 147.5%, a 47.5% uplift.

Pricing for commercial litigation is becoming increasingly competitive and services are often purchased by a procurement team rather than in-house legal. The procurement team’s job is often just to achieve the largest reduction or lowest fee possible. Many solicitors routinely offer up to a 30% reduction on headline rate to secure an instruction. Again, assuming estimated WIP of £200,000:

Example 2 – straight discounted fee agreement

Estimated fees £200,000

Discounted rate, no CFA, of say 70%

Solicitor bills £140,000, win or lose

Why not go a step further and instead of offering a 30% reduction with no upside, offer a greater, 50% reduction and accept some ‘skin in the game’? The contingent 50% can then be insured. Using the same example figures as above, this is how such an arrangement might work:

Example 3 – discounted CFA with ATE own fees cover

A 50% discounted CFA with insurance for 50% of the contingent element:

Estimated fees £200,000

Client pays 50% in any event £100,000

Contingent element is £100,000

50% of the contingent element £50,000 is insured

Deferred premium of say 70% of £50,000, £35,000

Case is successful, client pays £200,000 base costs plus a £100,000 success fee

Insurer is paid the £35,000 premium out of the success fee

Solicitor bills £265,000 net

Case is unsuccessful, client has paid £100,000 base costs in any event and is paid 50% of the contingent element, £50,000

Solicitor bills £150,000

As can be seen from the figures above, by offering the client a greater upfront discount and offering to share in the risk and reward, even if the case is unsuccessful, the solicitor’s net return is still higher than under a straight discounted agreement.

‘Innovative solutions’, ‘risk and reward’, ‘skin in the game’ are buzz phrases for clients increasingly looking to their law firms for solutions to the funding of litigation which both de-risks the process, and ensures the solicitor is invested.

Historically, for all but perhaps a few boutique firms, the downside of CFAs on commercial cases was just too great. The advent of own costs insurance cover might finally prove to be the catalyst for the greater use of CFAs in commercial cases, and indeed may provide a much needed boost to the DBA market.

Article published by Litigation Funding