Does Third-Party Funding Really Lead to More Frivolous Litigation?

One of the most prevalent arguments against third-party legal financing is that the number of frivolous lawsuits will increase when plaintiffs have access to financial resources that will cover litigation costs.  This argument is based on the idea that a plaintiff will be more likely to pursue litigation if a third-party is footing the bill in return for a right to share in the recovery.  Evidence from the Netherland suggests that this is not the case and that this argument against third-party litigation funding will not increase the number of frivolous lawsuits.

The legal system in the Netherlands has some important differences with its American counterpart, especially in the context of personal injury cases.  In the Netherlands, lawyers are generally not permitted to take cases on a contingent fee basis.  Consequently, a plaintiff who wants hire a lawyer to defend his or her rights must have access to substantial financial resources at the outset of a case to pay for both the attorney’s fee and other litigation costs.

Given the continuing restrictions on contingency fees, legal expenses insurance has recently become more popular in the Netherlands.  Legal expenses insurance, also known as pre-paid legal insurance, is a type of insurance which covers policyholders against the potential costs of legal action brought by or against the policyholder. The policyholder pays a regular premium and receives a guarantee that certain legal expenses, including attorneys’ fees, will be paid on the policyholder’s behalf.  In this respect, legal expenses insurance can be the practical equivalent of third-party litigation funding in that it relieves a party from the financial risk of engaging in litigation.

The expanding reliance on legal expenses insurance in the Netherlands has not led to a corresponding increase in legal claims, however. Between 1999 and 2003, the number of policies for legal expenses insurance increased by over 30 percent, but the number of personal injury claims remained stable.  Thus, even though more Netherlanders had the opportunity to sue without bearing the costs of the suit, they did not exploit it.

The lesson from the Netherlands experience is obvious.  Empowering plaintiffs by providing them with financial resources does not promote frivolous lawsuits.  Regardless of the vehicle for providing those resources, people sue when their rights have been violated.  Making resources available to them will not create an unwarranted burden the legal system, but it will make it easier to achieve justice.

Topics:  litigation finance, legal reform , third-party funding, litigation costs, legal costs, mass tort, personal injury litigation, alternative legal financing, legal expenses insurance, prepaid legal services, frivolous litigation

 Works Cited:

Michael G. Faure, et al., Funding of Personal Injury Litigation and Claims Culture: Evidence from the Netherlands, 2 Utrecht L. Rev. 1 (2006).

TownCenter Partner Team

TownCenter Partners, LLC lead Asset Manager is Mr. Roni A. Elias. From modest beginnings, and with the help of a hand-picked dream team of professionals we have built one of the most dynamic and fastest growing companies in the country. TownCenter Partners LLC(TCP) is a real estate partner and master-planner providing development, leasing, management, and third party services. The company’s demonstrated ability to apply big ideas in creative and innovative ways has played a defining role in the firm’s success. Yet, TCP's most important insight has been the core understanding that it is not sight lines or site plans, but human activity, that defines a space and creates a place.

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