Insurance’s Jarndyce v Jarndyce: An epic legal battle with big implications for litigation funding

20161210_fnd001_0Founded by former African American slaves, the west African country of Liberia has produced an insurance case that has bounced between the courts of several countries for a quarter of a century, condemning the claimants and their opponent to a generation of legal bondage. At long last, the saga might just be drawing towards a conclusion. It may also leave a legacy: to shift the calculus when third-party litigation funders assess the risks they face.

In the early 1990s, Liberia’s biggest importer, Lebanese-owned AJA, sued Cigna, an American insurer, in the federal court in Philadelphia for refusing to pay out over property damage incurred during Liberia’s civil war. AJA won, but a district-court judge overturned the verdict with a “judgment notwithstanding the verdict”—a rare device that can be employed when a jury is deemed to have deviated far from the law (in this case by failing to acknowledge a war-risk exclusion). The judge’s move was upheld by a higher appeal court.

Livid, AJA applied to Liberian courts and in 1998 won a judgment for $66.5m (now worth double that with interest). Cigna counter-sued, and in 2001 won an injunction in America barring any attempt to enforce that judgment anywhere in world. A Liberian judge later ruled that injunction itself to be unenforceable.

The next twist was that AJA assigned its interest to Samuel Lohman, an American lawyer, and Martin Kenney, a Canadian fraud-hunter based in the British Virgin Islands. They secured $3m in funding from Garrett Kelleher, an Irish property developer. Third-party funding is increasingly popular in commercial cases, and particularly attractive to entrepreneurs looking to invest some of their wealth in speculative bets with potentially high returns.

They then brought in 22 other Liberian firms with claims against Cigna. They also worked with Liberian officials, who appointed the country’s insurance commissioner as receiver, to go after Cigna’s former Liberian arm. In 2007 the receiver sued ACE, an offshore insurance giant that had bought and indemnified Cigna’s property-and-casualty business in the late 1990s, in the Cayman Islands. Plenty more tit-for-tat has ensued, involving arguments about jurisdiction, sovereign immunity and much else. But the most recent developments are the most intriguing.

ACE (now trading as Chubb, following a subsequent merger) went back to the Philadelphia courts to enforce the 2001 injunction. In July Judge Paul Diamond obliged, calling the other side’s behaviour an “affront” to American courts, declaring Messrs Kelleher, Kenney and Lohman in civil contempt, and calling a hearing for December 14th to determine damages payable to Chubb (which is seeking $14m). If the trio fail to show up, he ruled, they could be prosecuted for criminal contempt.

They say the court has overstepped its authority. “The long arm of American courts has been stretched to unprecedented lengths to throttle us,” says Mr Kenney. The judge, he argues, has become Chubb’s pawn in what is “essentially an offshore case”. The externally funded Cayman case was necessary to resolve a conflict between America’s legal system and Liberia’s, he says; American law is not inherently superior. As for the original war-risk exception, he notes that Cigna settled (for an undisclosed sum) with a much bigger claimant, Firestone, a rubber giant, over damage sustained in the same conflict.

Mr Kenney and his colleagues are, however, loth to explain this to Judge Diamond in person. That, they say, could undermine their jurisdictional objections to his rulings. They have launched an emergency appeal against the order to appear.

Evan Greenberg, Chubb’s boss (and son of “Hank”, a former CEO of AIG, once the world’s biggest insurer), says he is “incensed” by what he considers an attempt to wring “hold-up money” from his firm, and will spend whatever it takes to win. He sees evidence of a shakedown in the timing of the Cayman suit, which came just as the firm was dealing with regulators over the planned move of its headquarters to Switzerland—and therefore more likely to pay to make the suit go away. He rejects the idea that this is about a clash of legal systems that needs resolving in a neutral venue. “AJA yielded to American jurisdiction at the start and received full justice.”

Chubb’s lawyers say the case is a milestone in litigation finance: it shows that third-party funders can be identified (determining Mr Kelleher’s involvement was a long slog) and, in frivolous cases, held liable for costs over and above their original investment. “Now, they can lose more than their bet,” says one. A recent case in Britain extended funders’ liability there.

Mr Greenberg scents victory, and reckons the case is “near the end”. Don’t bet on it, says Mr Kenney, who vows to appeal against an unfavourable verdict all the way to the Supreme Court. Still, what’s another couple of years in a case this long?

This article appeared in the Finance and economics section of the print edition under the headline “Insurance’s Jarndyce v Jarndyce”

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SOURCE: www.economist.com

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