Canadian Underwriter

A new trend for BI coverage dispute lawsuits

May 28, 2020   by Greg Meckbach

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Commercial insurers who deny business interruption claims during COVID-19 could be sued by clients whose legal fees come from third-party litigation funding providers, an industry watcher suggests.

“One thing that is happening now is a lot of insurance companies are suggesting that business interruption doesn’t apply in a situation where a pandemic is involved,” said Edward Truant, CEO of Slingshot Capital Inc., in an interview Thursday with Canadian Underwriter.

Published reports indicate that one class-action lawsuit in Britain, in which the plaintiffs allege that insurers wrongly denied BI claims arising from the pandemic, has a third-party litigation funder involved.

“I can see a lot of that continuing to happen going forward,” Truant said of BI coverage dispute lawsuits in which the clients receive litigation funding.

Litigation funding is different from contingency fee arrangements. With contingency fees, plaintiffs do not have to pay their lawyers up front; if the plaintiffs win, the lawyers keep a certain percentage of the award. With litigation funding, a third party (not the law firm) fronts the costs; if the plaintiff wins or settles the case, then the third-party financing firm keeps a percentage of the award. If the plaintiff loses, the third-party litigation firm loses its investment.

Slingshot Capital operates a website for the litigation finance community. Currently in the marketing phase, the firm’s moniker is inspired by the Old Testament book of Samuel, which tells the story of David using a slingshot to kill the Philistine giant Goliath. “Litigation financing is really designed to support the Davids versus the Goliaths,” said Truant.

However, coverage disputes involving BI do not form the “lion’s share” of lawsuits attracting third-party litigation, observes Truant. Instead, third-party litigation funding tends to be more prevalent in commercial lawsuits alleging breach of contract or breach of fiduciary duty.

Product liability claims also lend themselves to third-party litigation. Claims against tobacco companies pre-dated litigation funding, but it is that kind of lawsuit that, if filed today, could attract litigation financing, Truant suggests.

Four years ago, there were no third-party litigation funding providers in Canada, said Truant, adding that the funding model really started about 20 years ago in Australia.

Litigation funding was an issue in 9354-9186 Québec inc. v. Callidus Capital Corp., released May 8 by the Supreme Court of Canada. Callidus is owed more than $100 million by Bluberi Gaming Technologies Inc., which has court protection from creditors. Bluberi also wants to sue Callidus and has third-party litigation funding agreement. A Quebec Court of Appeal ruling would have effectively quashed that agreement but the Supreme Court of Canada has now restored an earlier Quebec Superior Court decision that paves the way for the litigation funding agreement.

“I expect to see this much more prominent in the Canadian marketplace in the coming years,” Truant said of litigation funding agreements.

Scenarios could include bankrupt entities that lack the funding to launch lawsuits.

In commercial lawsuits, litigation funding will normally only be provided if the plaintiff is claiming $10 million or more, said Truant.

There are also forms of litigation financing for personal injury lawsuits such as slips-and-falls and motor vehicle accidents. But those tend to take the form of loans to plaintiffs.

“Perhaps they are on disability, they need some cash, they have some medical bills to pay, and so you help bridge them between the time of the accident and the time of the ultimate payout – typically the insurance firm,” said Truant.

By contrast, commercial litigation funding involves agreements in which the plaintiff does not have to pay the third-party funding firm but only has to share part of the damage award or settlement.

Third-party litigation funders can get their money from hedge funds, credit funds, family offices and high-net-worth investors, Slingshot Capital notes.

Editor’s note: A previous version of this story incorrectly described Slingshot Capital as a litigation finance firm. In fact, Slingshot Capital operates a website dedicated to the litigation finance community. 

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