No Money? No Problem! How Litigation Insurance can Help You Offset the Financial Risk of Litigation (Part 3)

Historically, defendants have obtained insurance policies for litigation cost protection. Industries and professions that are especially litigious often have multi-million liability policies purchased in advance to carry the costs of defending lawsuits and malpractice claims. Meanwhile, plaintiffs and their attorneys who work on a contingency basis have shouldered the financial risks of litigation, which limits the number of cases they are able to prosecute. But what if the tables were turned and insurance companies could allow plaintiffs to offset some of the financial risk associated with bringing a suit?

Litigation insurance” is new a trend spreading across the United States that provides coverage to plaintiffs and to attorneys who take cases on a contingency fee basis in the event that the case is lost at trial. The policy can be purchased after the complaint has been served, and if there is a zero-dollar recovery, then the insurance policy will reimburse most expenses, such as the costs associated with expert witnesses, discovery, and travel.

Although litigation insurance has been common in the UK and Canada for many years, Level Insurance sent waves through the legal community when it opened the first US-based company to provide this service. Justin Leto and Larry Bassuk founded Level Insurance after seeing a gap in the legal industry in protecting the investment made by plaintiffs’ attorneys working on a contingency basis to cover the expenses of the suit. Level Insurance now provides policies anywhere between $3,500 and $250,000, and premiums are set at 7% of the contracted coverage. These policies are available for most tort and contract claims, including professional liability, product liability, premises liability, business torts, and breach of contract.

Plaintiffs and their attorneys apparently agreed with Leto and Bassuk’s assessment of the market, and litigation insurance quickly spread throughout the United States. In 2016, litigation insurance was only available in federal districts, Florida, California, New York, New Jersey, Illinois, and Texas. Two years later, in 2018 the list of states where litigation insurance is available now includes Alabama, Arizona, Arkansas, Colorado, Florida, Georgia, Iowa, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, North Carolina, Ohio, Oklahoma, Pennsylvania, Tennessee, Virginia, Washington, West Virginia, and Wyoming.

But this rapid spread has not been without push-back from defense bar members, many of whom are concerned that the recuperation of legal expenses will lead to an increase in frivolous lawsuits, as it removes much of the deterrence from taking on  questionable cases. For example, in comparison to “litigation funding,” litigation insurance does not perform the same merit-based analysis of the case. Rather, case evaluation follows a “simple process,”comprised of only three eligibility questions.

However, many of the defense bar’s fears may prove to be unfounded, as litigation insurance does not dissolve all deterrent aspects of taking on a case. The insurance policy does not include many costs of the case, including attorney fees, opposing party’s costs, attorney’s fees awarded by the court, and the premium for the policy. Additionally, a claim can only be submitted if the case goes to trial and receives a zero-dollar recovery, which allows for frivolous cases to be disposed of through pretrial proceedings without any financial gain to the insured party.

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