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Third-party funding and legal expenses insurance

A new trend is the emergence of third-party funders in Australia and some EU countries, such as the UK, Germany, Austria, the Netherlands, and Ireland.[1] Third-party funding involves a third party, such as a bank, that finances the case, without having a direct interest in the case. The fees of third-party funders can be between 20 and 40 per cent, depending on the country.[2] However, third-party funding tends to apply mainly to high-value cases[3] and therefore does not offer a solution for smaller consumer claims. Given the recent appearance of third-party funders, questions arise regarding their role in controlling litigation and the need to regulate this phenomenon in order to prevent potential abuses.[3]

Another means of third-party funding in order to offset the heavy financial risks of litigation is for the claimant to subscribe to legal expenses insurance before a court claim arises. This type of funding is particularly prominent in civil law countries with predictable litigation costs, such as Germany, where tariffs exist for lawyers’ fees.[5] Legal expenses insurance also exists in the UK through the so-called ‘Before the Event Insurance’ and is obtainable as a separate policy, such as an add-on to household and motorcar insurance policies.[6] The advantage of such a funding model is that it is cheap and relatively safe for the insurer, because it usually excludes success fees. On the other hand, legal expenses insurance has been criticized in Germany for increasing spurious lawsuits.[7] It is also questionable if this funding model is suitable for collective redress actions. Given that this type of litigation could expose the insurer to significant financial risks it may often be excluded from legal expenses insurance schemes.

  • [1] Hodges, Vogenauer, & Tulibacka, The Funding and Costs of Civil Litigation (n 148), p. 27.
  • [2] Hodges, Vogenauer, & Tulibacka (n 148), p. 27.
  • [3] Hodges, Vogenauer, & Tulibacka (n 148), pp. 30-1.
  • [4] Hodges, Vogenauer, & Tulibacka (n 148), pp. 30-1.
  • [5] Hodges, Vogenauer, & Tulibacka (n 148), p. 21; in the same book see: B. Hess and R. Hubner,‘Germany’, pp. 3 58-9.
  • [6] J. Peysner, ‘England and Wales’, in Hodges, Vogenauer, & Tulibacka (n 148), p. 293.
  • [7] Hess & Hubner, ‘Germany’, in Hodges, Vogenauer, & Tulibacka (n 148), pp. 3 58-9.
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