Litigation insurance: Run for cover

Commercial lawyers are taking a more proactive approach to helping clients cope not just with complex legal issues but also with the costs and risks of pursuing litigation. As Berwin Leighton Paisner partner Bob Maynard highlighted (win first, pay later, 2 October, page 44), there are several ways in which a litigant can seek to minimise their financial exposure to risk and, where necessary, obtain funding assistance.

One of these is after-the-event (ATE) insurance. A litigant can buy insurance to protect themselves from the cost risk of losing their case. The policy will cover adverse costs orders and include an indemnity for their own costs, including disbursements such as expert reports or barrister fees.

The premiums are unique. They are usually payable once your case is successful - and only if your case is successful. These are known as “deferred and contingent” premiums. What is more, the premium is recoverable from the losing party in England and Wales if it is reasonably incurred. So it presents an attractive prospect for many clients involved in costly legal disputes.

Moreover, the premiums are stepped so they remain proportionate to the risk in the case as it progresses closer to trial.

ATE products have become an important part of many commercial lawyers’ tactical armoury, as they can produce big settlement incentives while giving litigants greater certainty about their cost exposure.

However, far fewer construction dispute litigants engage in risk transfer to insurers than litigants in areas such as professional negligence and investment disputes. This is despite a trend suggesting that mainstream litigation is on the increase. Law firm Reynolds Porter Chamberlain last month reported research showing a 10% rise in big-ticket litigation.

It is likely there has been a lack of knowledge about ATE. But awareness is rising, not least because solicitors are obliged to discuss funding options with clients.

The premiums are usually payable once your case is successful - and only if your case is successful. What is more, they are recoverable from the losing party if they are reasonably incurred

In fairness to lawyers unfamiliar with ATE, insurers have also found underwriting construction cases more difficult than other areas of law. Construction cases typically involve multiple parties and counterclaims, both of which can lead to difficulties in determining when a deferred and contingent premium is payable following a successful outcome. Winning a claim that is then wiped out by a counterclaim may not be considered a success by the litigant, but it depends on the policy as to whether a premium would become due. Underwriters now ring-fence certain awards or use offset provisions to create a fairer outcome for the client and insurer in such situations.

There have been other positive developments too. It is now standard for all stakeholders in the financial outcome of a case to enter into a deed of priority so it is clear which parties are paid first when a limited recovery leads to enforcement issues following a judgment.

Insurers have in the past refused to pay adverse costs incurred before a case has reached its conclusion, perhaps pursuant to losing an interim hearing - which is common in construction cases. Most modern ATE policies will pay interim claims.

There is a risk the court will make a security order for costs against an impecunious claimant, such as a small subcontractor bringing a claim against a larger adversary. In the past, the existence of an ATE policy alone would not have been enough to satisfy such an order due to the policy being voided (for a breach of the terms and conditions by the policyholder). Now, many ATE insurers can provide security through a bond or deed of indemnity, which guarantees they will pay.

Insurers are also more willing to provide solutions that can work with arbitration and other forms of alternative dispute resolution, particularly if the value of the claim is high. Some insurers are offering large discounts to the premium if a case settles at mediation. Parties are far more willing to accept terms in arbitration cases, even where the premium is not guaranteed to be a recoverable cost.

As insurers step up to the plate, those advising litigants in construction disputes must flag up the potential of ATE insurance to reduce litigation risk. Litigants should ask for advice on the subject if it is not raised by their legal advisers early on.

Matthew Amey is director of ATE insurance broker The Judge