Watch out for litigation funding in Canada, industry execs warn

A leader in the Canadian P&C industry is sounding the alarm about the rise of litigation funding in Canada.

Litigation funding is an arrangement in which a third-party company — not the plaintiff’s law firm — agrees to fund all or part of the plaintiff’s costs in a lawsuit. In return, they get a portion of the win or settlement. If the plaintiff loses, the company loses its investment.

Although the trend is still in its infancy, litigation funding in Canada could drive up social inflation and significantly raise insurers’ costs in the future, the exec said.

Litigation funding is a big driver of social inflation in the United States and is “very, very significant in Australia,” said Bernard McNulty, chief agent of Canada for Allianz Global Corporate & Specialty. “It’s just starting in Canada, really. It’s just getting off the ground. We’re starting to see that trend, but we’re really in the early days.”

Social inflation is a top concern for reinsurers too, according to Matt Wolfe, president of Aon Reinsurance Solutions Canada. “I would bold and underline that. That is, I think, the Number 1 topic of discussion, typically in the U.S. insurance market,” Wolfe said of social inflation during an Insurance Institute of Ontario webinar.

McNulty referenced a Supreme Court of Canada decision from May in which the “decision reflected the notion that litigation funding was not illegal in Canada. So it basically said to any of these private equity groups or some hedge funds that are involved in this that the door is open to do business in Canada.”

McNulty noted that these third-party firms are advertising directly to plaintiffs, rather than approach their law firm.

“You’re waiting for a settlement, we’ll provide you with funding in the interim,” is how he put their messaging. “That’s a little different than the model that first started in Australia, where they went directly to the class-action law firms first.”

iStock.com/DNY59

Furthermore, they’re charging 20% or more in interest. “That’s high interest, almost like credit cards,” McNulty said.

That’s why settlements have become so large — the litigation funding firm is getting a large chunk out the deal, he added.

Still, that won’t slow down the trend of clients seeking out litigation funding. As a result, “we insurers will start to pay higher settlements because of that,” McNulty said. “Unfortunately, that will ultimately be reflected in rate. That’s a trend that’s going to continue in Canada. As much as we may try to challenge that, I think it will continue.”

He referenced a number of cases with high awards:

• MacNeil v Bryan

In 2002, in a small town about 85 km northwest of Toronto. A vehicle driven by a 16-year-old ran a stop sign, became airborne and ended up in a ditch. The incident caused catastrophic brain injuries to its 15-year-old passenger. The court awarded $18.4 million.

• Marcoccia v Gill, Purba Furniture Limited, and Ford Credit Canada Limited

In 2009. A 20-year-old driver was struck in Toronto by a furniture delivery truck making an improper left-hand turn. He suffered catastrophic and permanent brain damage, requiring around-the-clock care. The truck driver, his company and its insurance company were successfully sued and the client was awarded almost $17 million by a jury.

• Sandhu v Wellington Place Apartments

In 2008, a young child fell from a window in a relative’s apartment with a broken screen in Toronto. The child suffered a severe head injury and numerous broken bones. Medical experts said the child would never be able to function as an adult and would need constant care. The child’s family was awarded $14.2 million by a jury.

One move the industry might make in response to such high awards is to ensure a complex personal injury case is settled and not taken to trial in order to keep costs down, he observed.

“We are very realistic about the value of a case,” McNulty said. “If we can settle a case and can understand the liability and damages before a trial, we’re going to settle that case before trial. I think generally that’s the approach for insurers in Canada, so that we don’t see these massive jury awards. I think the settlements reflect the true value of the cases.”

Feature image by iStock.com/erhui1979