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Litigation Finance Can Help Fund Texas Winter Storm Lawsuits

Although temperatures have normalized and power has been restored, the economic damage of last month’s winter storm is just beginning to be tallied.

Some experts estimate that damage from Winter Storm Uri could end up costing Texas as much as $295 billion—rivaling even the economic damage caused by Hurricane Harvey.  This is because, unlike the relatively localized harm that typically follows a hurricane, Uri’s wrath blanketed the state, resulting in damage to hundreds of businesses—both large and small—in the form of physical loss, business interruption, lost revenue, and long-term reduced output.

Businesses are turning to the courts to address these losses.  Dozens of lawsuits have already been filed and many more are expected in coming months.  Indeed, it is conceivable that every company in Texas was impacted in some manner by Uri.

Wide-ranging Energy Litigation

The energy sector was hit particularly hard and will be a breeding ground for litigation.  The historic storm shuttered many oil and gas operations across the state, creating a cascade of problems that culminated in power outages leaving millions of Texans in the dark.  Consumer lawsuits filed against ERCOT (the Electric Reliability Council of Texas) and certain large power suppliers alleging a negligent failure to winterize already have engendered a lot of press, and Texas Attorney General Ken Paxton has sued electricity provider Griddy for purportedly passing surging pricing on to consumers.  But another wave of litigation between energy producers and providers is likely.

The majority of power plants across the state require natural gas to operate.  As pipelines froze, gas supply was severely curtailed, and even those facilities that managed to stay online during the severe weather were unable to operate at full capacity due to both an inability to handle fuel already on site and a shortage of incoming supply.  Some operators turned to the wholesale market to purchase additional power but faced sky high prices.  One operator, Vistra Corporation, recently estimated in its 8-K filing that its losses could top $900 million.  Given these figures, it is easy to foresee contractual disputes arising between the plants and their natural gas suppliers over an alleged failure to deliver gas and the cost to cover.  Just last week, XTO Energy sued Macquarie Energy, arguing a force majeure clause in the parties’ contract excused its obligation to supply gas to Macquarie.  Scores of similar suits can be expected to follow.

Unprecedented Insurance Litigation

Insurance coverage litigation will also spike as companies turn to insurers to recoup their losses.  In fact, experts predict that Winter Storm Uri will generate the most insurance claims arising from a single event in Texas history.  As a point of comparison, Hurricane Harvey reportedly resulted in $19 billion in insurance claims.

Property damage claims for burst pipes and related water damage are particularly likely.  So too are business interruption claims, not only from Texas companies forced to close their doors due to property damage and loss of utilities, but also from their out-of-state business partners that depended on those companies’ output or supplies.  As we’ve seen from the rise of COVID-19 related business interruption litigation over the past year, these claims are likely to spawn disputes regarding the extent of a business’s interruption as well as the measure and cause of its loss.  Directors and officers of power supplies and distributors may also find themselves a target as claimants seek to tap into D&O coverage.

How Litigation Finance Can Help

Many companies grappling with the fallout from the winter storms were feeling financial strain well before snow blanketed the state, thanks to a tumultuous 2020.  Those now questioning how to bear the cost of storm-related litigation or business losses should consider litigation finance as a tool to bolster their bottom line.

Litigation funders can provide capital for the attorneys’ fees and costs needed to pursue a lawsuit, in exchange for a pre-negotiated return paid from case proceeds.  Litigation finance transactions are typically non-recourse, meaning the funder’s return comes only from a successful outcome in the case.  If the lawsuit fails, the client owes nothing.  This means companies weighing whether to pursue meritorious storm-related claims can hedge the risk of litigation at a time when legal budgets may be tight.

What is more, litigation funders can provide much-needed operating capital to help companies offset a portion of their immediate losses from the storm.  These funds can be used for any business purpose, such as making repairs or paying employees.  Again, the funder obtains repayment only through a successful case outcome, meaning the availability of working capital will turn on the value of the legal claims being pursued, not the company’s balance sheet or performance metrics.

It is important to remember that a strong legal claim is an asset for a business, and there will be many such claims arising from Uri and its aftermath.  Companies weighing whether to pursue storm-related litigation should consider funding as a resource to monetize those claims, hedge risk, and boost operating capital.

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Laina Hammond is Investment Manager and Head of the Houston Office at Validity Finance.
Sarah Williams is Portfolio Counsel at Validity Finance.