The practice by which a third-party investor funds the costs of legal proceedings in exchange for a share of any damages obtained in the event of success.
Third-party litigation funding refers to the mechanism by which a specialized fund or investor provides the financial resources needed to conduct legal proceedings in exchange for a fraction of the sums recovered if the proceedings succeed for the claimant. This funding typically covers lawyers' fees, expert costs and procedural expenses. In the event of failure, the investor loses its contribution. This model has transformed the civil litigation market, particularly in the United States and the United Kingdom, by enabling claimants with limited resources to pursue large corporations in complex cases, and by professionalizing law firms that manage these files as investment portfolios. The consequences for insurers are profound: funding extends the duration of proceedings, increases claimants' demands, promotes the emergence of nuclear verdicts and creates an information asymmetry by equipping claimants with superior procedural expertise. It contributes directly to social inflation and represents a structurally upward trend on the cost of general liability and D&O losses. Several European jurisdictions have begun to regulate this mechanism, notably in the context of the representative actions directive.
A US litigation funding firm invests 15 million dollars in a class action against a pharmaceutical giant whose executives are accused of concealing unfavorable clinical data. The funding allows the law firm to hire twenty experts for two years, to go to trial rather than settling, and ultimately to obtain a 340 million dollar verdict of which the fund receives 30 per cent. The group's D&O insurer had set reserves based on a historical average loss of 40 million dollars, revealing a critical inadequacy in its reserving model in the face of third-party-funded losses.
TPLF, litigation funding, financement de litiges, fonds de contentieux, third-party funding