Litigation funding losses “have only just began”

Phil Bellamy, group underwriting manager for DAS, has warned that third party litigation funding losses “have only just began”.

Bellamy (pictured) said he thought some parts of the funding industry were “in the last few days of the honeymoon period” and “one or two may even be on the flight home.”

He said the High Court’s decision in the Innovator One case in May this year made him smile, “not because three of our competitors had to pay costs totalling £10m” but because he felt that ATE insurers and their clients needed a reminder of their costs risks.

The 555 Innovator One investors lost a £50m negligence claim against Collyer Bristow stemming from technology investment schemes which they alleged constituted a fraud.

Bellamy went on: “This £10m loss, although painful at the time, will ultimately be good news for ATE insurers, in the medium to long-term.

“Up until this loss, there was the appearance, at least to the outside world, that litigation funding was a one way street, a sure fire bet.

“Funding company results and corporate updates would be issued every three to six months, with a similar, positive upbeat message from most parties.”

Bellamy said that on the face of it, it did sound very promising, almost “a licence to print money”.

However, he said any underwriter who had “been in the game for a decade or so” would know all too well that these results were unlikely to continue.

“They remind me very much of the early days of standard ATE insurance, whereby for the first year, second year, third, and even fourth year, insurers were posting or booking profits, without any thought of a robust reserving policy, or the dangers of the long tail costs liabilities, these risks carry.

“History teaches us, that anybody can make profits in the early years, as the easy cases settle, premiums and funding multiples are received, and cash flow is good.”

Bellamy said that when the honeymoon period ended for early ATE insurers, somewhere between the fifth, sixth and seventh year of trading, when significant losses from failed trials far exceeded the premium income from previous winners, insurers withdrew from the market, leading to reduced capacity and higher premiums.

He said it was likely that litigation funders would secure their insurance needs through a group of ATE insurers to spread their risk and reduce volatility.

“This method of group co-insurance or layering will be assisted by an increase in capacity from the ATE market, as more insurers seek to diversify their book with funded litigation insurance, in an effort to mitigate the destruction of our market caused by the LASPO Act and Jackson reforms.”