European insurers call on EU to develop rules on third-party litigation funding

A group of leading European business associations – including Insurance Europe – have issued a joint statement that calls for the EU to develop “appropriate” rules on third-party litigation funding (TPLF).

The statement comes as European businesses and insurers prepare for the EU’s coming Collective Redress Directive, which member states are obliged to transpose into their national laws by 25 December this year before applying those measures from 25 June 2023.

Insurance Europe explained that TPLF allows private financiers such as investment and hedge funds to sign confidential deals with lawyers or qualified entities to fund lawsuits and arbitration, in exchange for a cut of any settlement, award or judgment. TPLF is an estimated €40bn-€80bn market globally, it said.

There are more than 100 litigation funders operating in Europe already. But TPLF is largely unregulated in the EU, unlike other financial and legal commercial activities, pointed out Insurance Europe. “Private TPLF is not a public service and funders can decline cases, even meritorious ones, if they do not offer a sufficient financial return,” it pointed out.

The EU has made it clear that it does not want the Collective Redress Directive to usher in a US-style class action environment in Europe and the directive does attempt to limit options.

But many businesses in Europe are worried that the dam may be about to be breached. The insurers that Insurance Europe represents are clearly taking this situation seriously in an already worrying liability environment, with inflation rocketing.

“The introduction of a profit-motivated third party into the traditional attorney-client relationship presents a host of ethical issues and other public policy considerations. Funders may prioritise their bottom-line interests over the interests of the claimants and can unduly influence the decisions in a case. Funders can also arrange to be paid first and take a disproportionate share of any award, leaving claimants who suffered harm with little or no redress,” said Insurance Europe.

“With no obligation to see cases through to the end and no responsibility for adverse costs, funders can pursue opportunistic claims for a high reward with low risk. Faced with years of litigation, expensive legal bills and reputational risk, defendants may be forced to settle even unmeritorious claims,” added the federation.

Insurance Europe stated that the group of business associations signed up to the statement are, therefore, supportive of the European Parliament’s legislative own-initiative report on responsible private funding of litigation. This calls on the European Commission to propose “sensible safeguards” for effective oversight of TPLF in all areas of law and types of litigation.

“It is important for the investment climate in Europe that the EU supports justice systems that are effective, build trust and dissuade a culture of litigation. These are essential ingredients for the ‘Justice for Growth’ strategy embraced by the Commission,” concluded Insurance Europe.