Arbitration Insurance and Funding

Commercial disputes are risks for which parties may obtain insurance before or after the event.  

In the shipping industry, mutual insurers were established towards the end of the nineteenth century to fund the costs of bringing contractual claims. These are the freight, demurrage and defence (fd&d) clubs. They are often attached to P&I clubs (which provide liability insurance). Some of them are based in London but others are to be found in Scandinavia, USA and Japan.  

The clubs have developed sophisticated rules and practices which have won them respect from their members, their opponents and arbitrators appointed to hear disputes which they fund. As I know from having acted for and against club members in arbitrations over many years, the clubs have much to teach the new commercial Third Party Funding (TPF) providers. See my Lexis Blog post on Third Party Funding in Arbitration: the first 125 years.

I have written an article about this topic, entitled Navigating the Waters of Third Party Funding in Arbitration, which was published in the journal of the Chartered Institute of Arbitrators in August 2016. Click here to read the article reprint (by kind permission of the publisher).

At a seminar on arbitration organised by the London Shipping Law Centre (LSLC) on 14 June 2017, I gave a paper entitled  'Funders, Clubs and Rules: Can Maritime Arbitration be Different?' It discussed how the fd&d clubs were being treated in the drive to 'regulate' TPF. Click here to read my paper (by kind permission of the LSLC). 

The new form of TPF, whereby the provider receives a share of an award, is controversial in some circles but many of the issues which it is said to raise are familiar to shipping and commodities lawyers who have worked with clubs and with other traditional insurers.  

Having that experience and having also assessed and managed cases for TPF providers and for After The Event (ATE) insurers at Thomas Miller for two years, I have a perspective on these issues which led to my being invited to join, in May 2016, the ICCA-Queen Mary Task Force on Third Party Funding in Arbitration, which had been established in 2013: www.arbitration-icca.org/projects/Third_Party_Funding.html.

The Task Force had several TPF providers in its membership but no insurers. It eventually decided that maritime arbitration was outside the scope of its work and that funding in such cases would be carved out from its recommendations. However, it also made the peculiar decision to treat insurance as a type of TPF. The Task Force then recommended that insurance should be disclosed at the outset of an arbitration, apparently regardless of coverage issues or confidentiality obligations in a policy.

I was pleased to meet new people on the Task Force and to discuss perceptions that the participation of TPF providers in arbitration might be in need of regulation. However, I was disappointed that the Task Force did not take the opportunity to engage with insurers and their users and to learn from them. In my view, failures of representativeness and consultation vitiated the Task Force’s work. Its report was published in April 2018. Colleagues on the Task Force, and anybody else who is interested in these topics, are welcome to contact me to continue the discussion.

Jurisdictions which used to be hostile to TPF have opened up to it. See my 2016 LexisNexis Blog post on consultations in Singapore and Hong Kong. Legislation and regulations have since been introduced at both seats to permit and foster TPF for international commercial arbitration.

In setting aside the historical doctrines of maintenance and champerty, one of the issues which the authorities in Hong Kong and Singapore had to consider was the extent to which funders should be allowed to control the claims which they fund. The English courts addressed this issue in the context of the infamous Excalibur litigation and I have written about the implications of that case for third party funding in arbitration in a LexisNexis Blog post and in a Law of Nations blog post.

The codes of conduct in Hong Kong and Singapore do not contain a positive duty on funders to take 'rigorous steps short of champerty' in their assessment and monitoring of cases, as articulated by the English courts in Excalibur.

As long as TPF providers manage their customers’ cases to the same standard as insurers, they should secure the confidence of parties, tribunals and institutions.

The International Centre for Settlement of Investment Disputes (ICSID) invited comments on its proposals for revisions to its arbitration rules. I submitted comments on the proposal for mandatory disclosure of TPF and on the associated treatment of insurance. Download my letter here. I was pleased that the updated rules, published in March 2022, while requiring disclosure of TPF, did not extend the definition to insurance.

Reflecting on the over-reaction to TPF and the level-headed treatment it eventually received from ICSID, the LCIA and other organisations, I wrote a LexisNexis Blog post in October 2019, "Whatever happened to third-party funding in international arbitration?".