Litigation finance not the main driver of social inflation: Burford Capital

Insurers might serve themselves well by becoming more discriminating in their criticism of litigation finance—stepping back from an approach that lumps together everyone on the other side of a courtroom and draws overly straight lines between litigation finance and every hit to reserve adequacy.

That’s the message to insurance lobbies, including the APCIA, from some of the biggest names in litigation finance at Burford Capital—by its own count the largest investment pool fully dedicated to financing legal conflicts. 

“Our main complaint is that the critique of legal finance doesn’t discriminate between the stratum in this marketplace,” Andy Lundberg, managing director of Burford Capital, told APCIA Today.

“We read these critiques about legal finance ‘creating’ social inflation,” Lundberg said. He sees this as “rather frenzied” finger-pointing: everything from lawyer advertising to ever-rising plaintiff expectations to theories around how lawyers influence jury decision-making “by appealing to the reptilian complex of jurors’ brains” is all being connected to litigation finance. But putting all these things together is unhelpful, he said.

Burford Capital, which is listed on the New York Stock Exchange, provides capital and expertise to help businesses and law firms “maximise commercial litigation and arbitration recoveries”, it states on its website. Commercial legal finance or litigation funding provides businesses and law firms with money from a third party finance provider to pay for commercial litigation and arbitration. 

No win, no pay

Capital typically is non-recourse, not debt—meaning the investment and return are paid only on a successful resolution.

One way to look at such an arrangement, Burford Capital notes, is as a form of insurance. Indeed, it notes, insurers do the same thing through any number of covers designed to manage legal risks.

“A majority of cases financed have no insurance money backdrop.” 

“In its simplest terms, we value any kind of legal risk, and we help counterparties value and manage risk and, to the extent interested, offset risk,” David Perla, vice chair for marketing, public policy, industry affairs and public relations at Burford Capital said. “We do the same thing that P&C does in terms of underwriting.”

Lundberg notes that in the majority of the firm’s caseload, no insurer is involved. “The bulk of what we do as commercial litigation financers is completely outside the scope of insurance,” he said.  

“A majority of cases financed have no insurance money backdrop at all.” 

He cites patent infringement litigation, anti-trust cases and breach of contract between the nation’s biggest heavyweight firms, saying: “you can’t buy insurance in the market for that”.

“With sophisticated actors on both sides, all handling the issues as a form of risk management, our model of litigation finance isn’t one of preying on weak counterparties in search of high insurer-funded settlements,” he explained.

“Consumer legal finance, based in individual personal injury cases, may be a whole different question,” Lundberg admits. “That is all about seeking court recovery from insurance assets.”

On this basis, Burford Capital feels insurer criticisms of litigation finance as a source social inflation, wherever it occurs, are misjudged.

“Insurers simply see that something is happening in the courtroom that didn’t used to happen—be it magic dust to sprinkle on juries or reward expectations created in some mysterious way,” Lundberg said. 

While all those things might be true, the reasons behind them are more complex.

If oversimplified arguments are Lundberg’s target, he’s not entirely wrong. “Social inflation” and ”legal abuse” are now regularly blamed for any dip in casualty earnings. Arguments get shortened. One prominent CEO has said: “There is no such thing as social inflation, it is only legal system abuse.

“Lawyer advertising, huge jury verdicts: any lawyer can learn it at the seminars. These don’t have anything to do with whose capital is being deployed,” Lundberg concluded.  

For more news from the American Property Casualty Insurance Association (APCIA) click here.

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