Litigation Funding Versus Liability Insurance: What's the Difference?

Abstract

Having studied insurance defense arrangements for years, I was mystified by the strenuous opposition mounted in certain quarters to third party litigation funding. For it seemed to me that liability insurance, which ordinarily requires insurers to bear both the cost of defending claims and the burden of paying them, is subject to every complaint lodged against third party funding. Both encourage lawsuits, influence settlements terms, have payers intermeddling in litigation, etc. Yet, in the United States, insurers have covered litigation risks for over a century, and no one proposes getting rid of them. To the contrary, some writers, including me, worry that certain actors have too little insurance and should perhaps be required to purchase more. Yet, if liability insurance and third party funding are objectionable on the same grounds, why should one want more of one and less of the other? In this Essay, I will make good on the claim that the major objections to third party funding have analogues applicable to liability coverage. I will also explain why the analogues have not led us to prohibit carriers from selling insurance, and why third party funding should survive them as well. When carrying out this project, I will focus on contracts between funders and claimants, rather than between funders and lawyers. The former resemble liability insurance arrangements more nearly than the latter, which are substitutes for accumulated wealth, bank loans, and other sources lawyers have traditionally used to finance cases.