Betting on Tort Suits after the Event: From Champerty to Insurance
30 Pages Posted: 9 Jul 2012 Last revised: 7 Oct 2012
Date Written: July 9, 2012
Litigation financing is investment by a stranger into a lawsuit in which she has no interest other than the investment. The common law prohibitions on champerty and maintenance rendered litigation finance illegal for centuries, but today it is permissible in England, Europe, Australia and many U.S. jurisdictions. This article, which was prepared for a symposium on “Uncertainty in the Law” at DePaul Law School, examines one argument against litigation finance, which is that it allows strangers to impermissibly bet on the outcome of litigation.
The article first briefly reviews the handful of modern courts that have embraced the “Betting Argument” and their reasoning. It next looks at other examples in law where the risk of a party betting on an outcome provided the grounds (whether pretextual or not) for the prohibition of a contract between two persons. Thus, late Nineteenth Century courts were initially inclined to prohibit commodity futures contracts on the ground that they were a form of gambling. Similarly, life and fire insurance was viewed skeptically as a form of gambling until courts developed a moralized concept of “insurable interest.” The concept of the insurable interest provided rationale for courts to uphold insurance when it preserved what the insured already had and to strike down “bets” that allowed strangers to gain as a result of other’s misfortune.
The article concludes by noting that the instability of the tests invoked by earlier courts in the commodities and insurance context suggests that it may be impossible to identify and employ an a priori test for when third party investment in litigation is permissible. However, the article notes that many of the same policy concerns which led courts to accept commodities contracts and insurance contracts should lead courts to allow litigation finance. While the article does not rebut other arguments against litigation finance based on other moral or prudential concerns, it does attempt to quiet concerns based on the Betting Argument.
Keywords: Litigation, insurance, torts, courts, champerty
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