Damages-based agreements were re-introduced, as part of the civil justice reforms, in 2013. The ban on contingency fees was lifted in response to CFAs and ATE insurance premiums no longer being recoverable from the losing party. However, to date, DBAs have failed to make a significant appearance; largely due to the huge risk to be borne by the law firm who, in offering a DBA, agrees to only being paid should the case be successful. Another disadvantage was the inability to form a ‘hybrid’ DBA which allowed for part payment of fees during the life of the litigation to the law firm, win or lose, in return for the risk-sharing on its part.
But this is all likely to change. Enter the new DBA insurance delivered to the market by Insurance broker, TheJudge. This insurance is offered to litigators willing to engage with the insurer on a contingency fee basis. The Law firm will be protected for an agreed level of its fee risk when acting under a DBA. If the case is unsuccessful the firm will be reimbursed the insured portion of its fees. This typically amounts to between 40 to 60% of its fee risk, thereby, providing greater financial certainty as a result of limited risk exposure. The premium will only be payable if the case is won. In the event of a case being lost or in the event that the contingency fee recovered is too small to reimburse the fees incurred by the law firm, the law firm can claim on the policy.
DBA insurance, therefore, guarantees some fee income; regardless of the outcome of the case.
Given the risk to the insurer, it is likely that these premiums will be substantial. This will, no doubt, be a huge factor to be taken into consideration when agreeing the DBA terms with the client and is, therefore, likely to impact upon the ‘payment’ to be agreed. It appears that this method of funding will offer the client a more cost effective way of litigating the claim whilst also alleviating some of the law firm’s risk. Having the ability to maintain an element of financial assurance may well result in a greater usage of DBAs…however, in order to be successful the cost of the insurance will need to be feasible and sustainable for the law firm as well as making commercial sense to the client.