Why Litigation Finance for Plaintiffs Is the Same as Insurance-Financed Litigation for Defendants
When courts strike down litigation financing agreements as against public policy, or when commentators argue that litigation financing is wrong, they often focus on the fact that the involvement of a third party in a legal dispute might give control over the litigation to a party whose rights are not at stake. This transfer of control from a right-holder to a financier is viewed as problematic when the transfer is from a plaintiff to an investor. But it is never viewed as problematic when the transfer is from a right-holder to an insurer. This begs the question whether litigation finance is really just the plaintiff’s own equivalent of insurance.
The role of insurance companies in litigation is pervasive and reflexively accepted. The owner of an automobile buys an insurance policy to indemnify her against any losses associated with the automobile or property. If there is a car crash or a slip-and-fall and a lawsuit follows, the insurance company uses its duty to indemnify as a reason to take over the defense. The insurer hires the lawyer, approves (or disapproves) litigation expenses, defines the acceptable range of settlement, and decides whether to approve an appeal, among other things.
Of course, the inverse situation is not so readily accepted. If a plaintiff files a suit to claim legal rights and then reaches an agreement with a third-party to defend his rights, and if the third-party pays for the lawyer or the expert witnesses, determines when it will or won’t accept a settlement, or makes other fundamental decisions about how the litigation should proceed, the third party’s involvement is often described as “officious intermeddling.” Old common-law doctrines and many new legal rules are arrayed against such assistance to plaintiffs.
How can this distinction be justified? When viewed without our habitual prejudices, is there really any difference between the plaintiff and the defendant who get financial help in litigation from a third party? In both situations, a party faces the prospect of an economic loss, either losing a judgment or suffering an uncompensated injury. And in both situations, that same party makes a contract with another to spread the risk of loss or to share the value of defending its rights.
Of course, these are rhetorical questions. There should not be a difference. Plaintiffs and defendants should both able to spread their respective risks and costs to level the playing field and bring about a greater chance of just results. Litigation funding for plaintiffs is just the flip side of insurance, and it should be viewed with just as much reflexive acceptance.
Topics: litigation finance, insurance, third-party funding, litigation costs, legal costs, law reform
Works Cited:
Symposium, The Economics of Aggregate Litigation, 66 Vand. L. Rev. 1641 (2013)