Comparing Third Party Financing of Litigation and Legal Expenses Insurance
44 Pages Posted: 29 Oct 2012
Date Written: April 20, 2012
This article compares Third Party Financing and Legal Expenses Insurance from an economic perspective. Such a comparison deserves attention for at least two reasons. First, LEI is not particularly widespread in Europe, as is often alleged. In most European countries in which the government does not push LEI (e.g., by making it compulsory), LEI is not that common. This raises the question whether the market for LEI suffers from market failure, and if a failure in the market for LEI could hinder the development of the market for TPF. An economic comparison of TPF and LEI may also shed light on the relative social costs of TPF and LEI. The social efficiency of TPF has been intensely debated in the recent literature, and many advantages and disadvantages have been examined. This article examines to what extent TPF and LEI differ with respect to these advantages and disadvantages. It looks at the volume of litigation, the quality of litigation, the accuracy and likelihood of settlement, and the transaction costs of disputes. Such a comparison could help policymakers decide whether or not to stimulate TPF (e.g., through relaxing some current legal restrictions) and/or legal expenses insurance (e.g., by a tax deduction).
Keywords: legal expenses insurance, third party financing of litigation
JEL Classification: K40, K41
Suggested Citation: Suggested Citation