'Game-changer' for UK litigators with launch of first DBA insurance

Damages-based agreements are set to become more popular with the launch of a new insurance product for law firms engaged in litigation.

Global litigation finance and insurance broker TheJudge has launched a new DBA insurance product which it believes could be a 'game-changer' for the UK legal market. The specialist insurance is available to commercial dispute resolution teams willing to accept an engagement on a contingency fee basis.

DBAs were introduced as part of a package of civil justice reforms in 2013 to counter the effect of CFAs and ATE insurance premiums no longer being recoverable from the losing party.

DBAs share litigation risk with the client in return for a share of the damages but concerns about how the legislation around them was drafted means they have largely been ignored by the majority of litigators.

A 2016 survey revealed that 82 per cent of London Solicitors Litigation Association members had not offered DBAs to their clients. Sixty-four per cent favoured a 'hybrid' option which allowed for some payment to the law firm, win or lose, in return for the risk-sharing on its part. However, this was ruled out.

The new DBA insurance protects a law firm for an agreed level of its fee risk when operating on a DBA. If the case is unsuccessful the firm is reimbursed the insured portion of its fees, typically amounting to between 40 and 60 per cent of its fee risk, providing the firm with greater financial certainty by limiting its risk exposure.

The premium payable for cover is dependent on the case succeeding and the firm recovering its contingency fee. If the case is lost, or the contingency fee recovered is too small to reimburse the fee budget, a firm can claim on the policy and has no liability to pay a premium. A premium is only payable if the case is won.

'So often we see law firms frustrated when they watch significant returns being passed to third-party funders for cases which they have successfully litigated, and where they only received base fees,' said Matthew Amey, a director at TheJudge.

'Other firms fear they are in a losing battle to hold on to the billable hourly rates. In the face of increasing competition, law firms are discounting their headline rates in order to secure instructions to such an extent that many are worried the situation will not be sustainable in the long term if they want to provide the same quality of service. Others, trapped by their ability to react given internal billing restrictions, lose clients to firms that do offer DBAs or other alternative fees.'

Amey said DBA insurance will provide firms with greater flexibility to attract new business and 'potentially create a new and accelerated financial growth plan'. 'It also helps with the age-old challenge of how law firms financially account for the WIP incurred when operating on a contingency basis. The insurance provides certainty over a certain level of fee realisation to help firms plan for the future.'

James Blick, a director who heads TheJudge's US operation, added: 'There are countless examples in the US where law firms have grown significantly on the back of successful contingency fee deals. Many of these firms started without a war chest, with the partnership taking a huge risk in the early years. UK litigators can now pursue similar growth but with the distinct advantage of having the insurance market remove a significant proportion of the risk.'

Mark Shillito, UK and US head of dispute resolution at Herbert Smith Freehills, said: 'The flexibility to be able to offer our clients a range of innovative fee arrangements is vital if we are to continue to meet their changing needs. However, pricing arrangements must be sustainable for the law firm as well as attractive to the client.

'Being able to share the contingency fee risk with insurers enables law firms to align their interests with those of the client and demonstrate their confidence in the claim while maintaining an element of financial certainty when working on a contingent basis. This could prove to be a real game-changer in the use of damages-based agreements by law firms in the UK.'