(Bloomberg) — A growing market niche where investors profit from others’ legal troubles is getting a boost from Covid.
Distressed-investing funds and litigation-finance boutiques are likely to be spoiled for choice after a landmark U.K. court ruling last month rejected pleas from insurers looking to dodge pandemic payouts. They’re looking to finance or buy denied Covid-19 insurance claims for policyholders without the means or stomach for taking their insurers to court.
“This is going to be huge,” said Steve Cooklin, chief executive officer of London-based litigation funder Manolete Partners Plc, whose biggest shareholder is veteran distressed investor Jon Moulton. “It’s hard to say at this stage how big exactly this issue is, but it’s probably going to be in the hundreds of millions of pounds.”
Insurers have warned that Covid-19 coverage claims could top as much as $100 billion –- potentially the industry’s largest loss in history. Business-interruption coverage, which protects against losses when companies have to shut for a period of time, has been one of the most costly and contentious policy lines in the pandemic. U.K. virus-related claims, including on business-interruption policies, could exceed $2 billion.
A real-world example involves bankrupt U.S. department-store operator Century 21’s decision to sell its rejected business-interruption claim for $59 million in December, according to court documents. The Gindi family, which owns the retailer, bought back the right to the $150 million policy, betting it will pay off in the long run.
So far, insurers are faring well in the U.S. courts, where judges have backed coverage rejections at a rate four times higher than the claims are being allowed, according to an analysis by a University of Pennsylvania researcher. The key to making this new form of litigation arbitrage pay is a cold-eyed policy assessment by seasoned insurance lawyers to find language backing up coverage demands, said Stuart Grant, head of Bench Walk Advisors, a litigation funder with offices in New York and London.“These are challenging investments,” said Grant. “Since this is bespoke financing, you have to tread carefully.”