The second half of the 20th century saw a major increase in the expansion and sophistication of insurance products covering the exposures of businesses to loss and liability. By the dawn of this century, insurers were marketing an astonishing number of novel insurance policies covering previously uninsured risks. Among these was After-the-Event(ATE) insurance, which has since become a familiar tool in the corporate risk management toolbox. ATE coverage is regularly brought to bear in managing companies’ exposures to litigation risk—especially in “loser pays” cost-shifting jurisdictions that hold unsuccessful litigants responsible for their adversary’s, as well as their own, legal fees and disbursements.
This article notes the differing approaches to cost shifting among jurisdictions. It then discusses the essential and optional features of ATE insurance, and how the coverage can be applied by both plaintiffs and defendants to facilitate access to the courts, manage legal risk, gain settlement leverage, and complement other legal finance solutions.
Cost shifting: “Loser pays” versus the “American rule” on fees
At the outset, understanding ATE insurance and its widely varying popularity among jurisdictions requires an appreciation of a concept that most lawyers may hear about in one classroom hour in law school, if that: the fact that ultimate liability for a party’s own, and its adversary’s, “costs” of engaging in litigation is not assigned the same way around the world.
In the United States, under the so-called “American Rule,” the prevailing party is generally able to recover from its adversary a wide range of its out-of-pocket litigation “costs” (court filing charges, expert witness fees, litigation support vendors, photocopying costs, etc.) incurred in contesting the case (in the absence of specific state or federal fee-shifting statutes, which generally address non-commercial disputes)—but these “costs” do not include the major component of litigation expense: Attorney’s fees.
Absent a contractual fee-shifting agreement, parties to US litigation bear their own attorney’s fees. Although recoverable “costs” can be substantial in a large commercial case, they are rarely so significant (relative to the sums in dispute and the attorney’s fees incurred)
that they play a major role in the parties’ case valuation and settlement strategy. In the US (where “settling for costs” rivals “nuisance settlement” as shorthand for a negotiated resolution involving corporate pocket change), businesses and their lawyers may thus find
the concept of insuring against an “adverse cost award” somewhat precious—a canine flea collar fitted to a bull elephant, to no particular effect upon the overall litigation environment.
Quite a different calculus obtains in jurisdictions—courts and arbitration fora—where the adverse party’s recoverable “costs” are permitted to include not just its out-of-pocket expenses but also the full quantum of its reasonable attorney’s fees—which in complex commercial cases run easily into seven and eight figures. That “loser pays” attorney’s fee rule (also known as the “English Rule”) followed in fee-shifting jurisdictions makes exposure to the adverse party’s fees and disbursements incurred in conducting the case a potentially
very material consideration in determining whether and for how long to prosecute or defend regardless of the scope of the “costs” awardable. To date, however, the relatively low magnitude of that exposure under the American Rule, coupled with the fact that the great
majority of litigated disputes are ultimately resolved by settlements that wrap the recovering party’s recoverable costs into the final lump-sum settlement figure, has made ATE insurance a subject of far greater interest in fee-shifting jurisdictions.
ATE insurance basics
Currently, ATE insurance can insure against several risks of loss, all flowing from an adverse litigation outcome suffered by the insured party, that more familiar forms of commercial (and personal) insurance do not cover. ATE insurance’s principal feature lies in shifting the risk that an unsuccessful litigant will, in addition to its loss on the merits, have to bear its adversary’s and/or its own legal fees and expenses in contesting the matter. It thus reduces the level of economic risk the litigant faces and permits commercial litigants to
move that portion of their litigation risk off their balance sheets.
Scope of coverage
Although policy forms vary considerably, ATE coverage essentially protects against specified economic consequences of unsuccessfully pursuing or defending against a legal claim. Those consequences chiefly include:
- The insured party suffering liability for the legal expenses (legal fees and/or other legal costs) of its litigation adversary (“adverse costs coverage”) as a result of unsuccessfully asserting its claims or defenses—including results that fall short of terms the adversary
offered in settlement where the law provides for adverse cost award (e.g., Part 36 of the UK’s Civil Procedure Rules), which can include “interim” (interlocutory) cost awards; and/or
- The insured party’s obligations to its own professionals in the event of an adverse litigation outcome (“own side coverage”)—some such policies covering only “disbursements” (out-of-pocket payments to expert witnesses, litigation support vendors and the like), others extending coverage to a portion of counsel’s professional fees as well.
Importantly, ATE insurance may be accepted by courts or arbitral tribunals as sufficient security for costs that they may require be posted prior to judgment or award. Where the ATE insurance itself is not accepted as security for costs, the ATE insurer may, for an additional premium, endorse the policy with a “non-avoidance” provision that guarantees payment to the adverse party regardless of any defenses the insurer might otherwise have under the policy.
Risks and limitations
ATE coverage is a contract that shifts a specified amount of risk from the insured to the insurer, in exchange for a premium, on stated terms and subject to stated conditions and exclusions, subject to the usual rules of contract law and those specific to ATE insurance. ATE insurance is thus no more an unqualified license to litigate than a general liability policy is a license to inflict personal injury or property damage on a third party. Insurers have on occasion successfully resisted payment in whole or in part under ATE coverage on various grounds—some common to all insurance policies, some specific to the ATE product.
Defenses generally applicable to insurance policies that apply to ATE coverage include:
- Defenses based on concealment or misrepresentation of material underwriting information in applying for the policy;
- Defenses premised on the insured’s failure to satisfy conditions to the insurer’s performance (e.g., timely notice of loss, communication of material developments in the litigation, obtaining insurer consent to settlement).
Defenses specific to ATE coverage may include:
- Exclusion of coverage going forward in the event it is determined during the course of the covered proceedings that the insured is likely to suffer an unsuccessful outcome (with the insured having the right to contest that issue with the insurer);
- Exclusion of coverage for loss caused by the insured party’s abandonment of the action without the insurer’s consent;
- Exclusion of coverage for loss caused by the insured’s or its counsel’s failure to comply with applicable court rule and orders.
As with other litigation risk management products, ATE insurance is underwritten at every level, ranging from small tort claims through massive commercial disputes. In England and Wales, solicitors are obliged to ensure that clients are advised as to how their matter will be priced and its likely overall cost, which in practice likely includes a discussion about ATE insurance. This applies even in the case of minor personal injury claims (and indeed, insurers dealing with smaller claims sometimes delegate their underwriting authority to counsel, who can bind coverage for their clients on the spot). At the upper end of the market, where adverse cost awards can run into many millions, ATE policies are written on a bespoke basis, with underwriters delving into the merits of the claims and defenses at some depth.
ATE policies may be purchased at any time, from before proceedings are commenced and forward, although underwriters may exclude coverage for adverse costs incurred prior to policy inception or increase the premium to include such costs.
Pricing and payment
Pricing for ATE insurance varies similarly. At the lower end, coverage is issued for a set price; at the upper reaches, pricing is negotiated on an individual case basis. Premiums may be “staged” according to the progress of the case, making the policy less expensive the earlier the case is resolved. Premiums may also vary depending upon when in the course of the proceeding the coverage is purchased, as the risk profile of the litigation becomes clearer with the passage of time.
ATE insurance can entail either or both an upfront premium, payable by the insured at inception of the policy, and a contingent and deferred premium payable out of the proceeds of a recovery by the insured. Where a deferred premium is offered to a claimant, a key feature of ATE coverage is its non-recourse nature: in the event the claim is unsuccessful (as defined in the policy), the premium is not owed, and the insurer pays the loss as and to the extent called for by the policy terms.
A tool for plaintiffs and defendants alike
Although most commonly thought of as a claimant-side product, ATE coverage offers options to both plaintiffs and defendants across the spectrum of litigated disputes.
For claimants, ATE insurance provides a third-party source of funds to partially defer and de-risk the costs of prosecuting their claim should the claim itself not produce a recovery sufficient to do so. ATE coverage is thus a complement to the various other litigation financing resources, beyond the plaintiff’s own assets, that are available to meet the costs of bringing suit, including partial or full contingent-fee agreements with counsel; third-party recourse or non-recourse financing of legal expense; partial claim monetization; judgment or settlement protection insurance; and others. (Indeed, ATE insurance gained its first real foothold in 1999 with the Parliament’s adoption of the Access to Justice Act—which, in addition to authorizing ATE coverage, loosened traditional restrictions on contingency fees.)
As with other legal finance products, ATE insurance can be particularly useful in the insolvency context. In the case of a deferred premium, the non-recourse nature of the arrangement allows trustees of insolvent estates to pursue affirmative claims on the estate’s behalf without incurring liability for adverse costs falling within the scope of the insurance.
Where the existence of ATE insurance is disclosed to the adverse party (as may occur in the event the adversary applies for the posting of security for costs or otherwise), plaintiffs may also gain some benefit in the settlement context, flowing from the fact that a sophisticated third party, the insurer, has shown itself willing to take on the adverse cost risk of the claim.
Corporate defendants are quite accustomed to bringing insurance to bear to defend and indemnify them against legal claims. ATE coverage serves as a complement to their more familiar liability insurance policies. Liability policies typically include, either within their limits of liability or in addition thereto, coverage for (a) the legal fees and costs the insured defendant incurs in defending against claims that are clearly, or in some instances merely potentially, within the scope of the coverage provided, whether it be for automobile liability, product liability, defamation, or a host of other exposures; and (b) in the event of an adverse result, indemnity against both the plaintiff’s proven damages and the awarding of the plaintiff’s costs and/or attorney’s fees incurred in prosecuting the claim to a successful conclusion.
ATE insurance addresses a defendant’s exposure to legal expense in disputes that mainstream coverages—general liability, product liability, directors-and-officers liability, environmental and other policies—generally do not cover. These uninsured or uninsurable claims include breach-of-contract claims, IP disputes, antitrust suits, and many others—claims that can in theory, and regularly do in practice, equal or exceed the insured’s exposure to claims covered by insurance. In such cases, the defendant’s purchase of ATE insurance protects it against the risk that a successful plaintiff recovers, in addition to its provable damages on the claims it asserts, its potentially large attorney’s fees and/or costs incurred in prosecuting the claim.
The role of ATE insurance in the litigation risk management toolbox
Originally conceived of as a stand-alone product in the litigation arena, ATE insurance is today best appreciated as one of an increasingly robust suite of litigation risk solutions, which can be used individually or in simple or complex combinations to optimize the outcome of litigation from risk, cash-flow, and accounting standpoints. That suite includes:
- Conventional insurance: defense coverage included in liability insurance policies. Many forms of liability insurance cover the insured defendant’s legal expenses (fees and costs) incurred in responding to potentially covered claims, either as part of or in addition to limits of liability, in addition to indemnifying against ultimate damages and cost liability to the claimant.
- Litigation finance products (single case or portfolio). Plaintiffs, and lawyers working on contingency, can fund the pursuit of claims through non-recourse litigation financing, which is paid for out of any ultimate recovery (thus moving the litigation spend off the balance sheet). For defendants, where insurance is unavailable or inadequate, litigation finance can also protect the party’s downside with respect to ultimate litigation expense incurred, with the premium paid out of realized savings against target result.
- Claim monetization. Legal financiers will also advance the plaintiff a portion or all of an unresolved claim, in exchange for a return of the advanced amount plus a premium upon successful final resolution, or take an outright assignment of the claim where permitted.
- Claim value/judgment/settlement protection insurance. For a premium paid in advance, insurers will assure the recovery of all or a stated portion of the recovery established by an existing judgment or settlement, against the risk of reversal on appeal or judicial rejection of settlement, or even insure a recovery on a claim that remains unresolved in the first instance.
Sophisticated litigants can construct litigation risk management programs using several of these resources in combination. For example, at the outset of an action, a plaintiff could finance its legal fees and disbursements through judgment using third-party financing, protecting its adverse cost exposure through ATE insurance. Upon securing a judgment, it could then obtain further non-recourse financing to pay the premium on a judgment protection insurance policy that assured its recovery of at least 75% of the judgment amount regardless of the outcome of the defendant’s appeal. An essentially unlimited number of such permutations permit parties to fine-tune their litigation risk, duration risk, cash flow, and financial statement treatment of significant commercial disputes.
ATE insurance can play a significant role in managing a party’s litigation cost exposure in cost-shifting jurisdictions. As with any significant insurance purchase, reliance on experienced financial, insurance and legal professionals will maximize the value of the policy and ensure alignment between policyholder expectations and the language of the insurance contract.
This article was originally published in PLI Chronicle here.