Considerations when obtaining adverse costs insurance

The competition class action arena is a lively market. In the largest cases, several groups rise up led by different law firms all competing in the book building process. The claimant must decide which group is offering the best deal for them (or whether to opt out and go it alone), a question which will often boil down to the underpinning litigation funding arrangement.

The use of litigation funding and ATE insurance has become common place for multi-claimant actions. For some cases, a combination of these products provides the only realistic solution to the financial and logistical problems of managing legal fees across a significant number of claimants, many of whom will not have the funds to bring a claim on their own. For others, such as those involving corporate entities, litigation finance products are often the tool of choice to maximise their legal budget and to take what is likely to be a costly legal spend “off balance sheet”.

The hero and its side kick

Litigation funding is often hailed as the hero for providing a convenient and commercial way to manage claimant costs and disbursements in multi-claimant cases and most lawyers understand the way in which it can be used. However, it rarely operates in isolation in cases in which costs can follow the event. After the event insurance (or more specifically in this case, adverse costs insurance) is the vital side kick that many consider a necessary evil but that, more often than not, is the key to unlocking the litigation funding arrangement in the first place. Whilst some funders may be willing and able to provide an indemnity for adverse costs in the event the case is unsuccessful, few will retain that potential exposure when they are already investing multi millions in the claimant’s own costs. Others will have internal investment criteria that prevent them from funding the case at all without adequate adverse costs insurance in place.

Litigation funding and adverse costs insurance are distinct products, usually offered by different providers. Many funders, however, will offer to assist the claimant in obtaining adverse costs insurance either through referring the case to a broker to seek cover on the open market or through an arrangement they may have with one or more preferred insurance providers. This may sound very helpful of them. And it is. But it’s not surprising since it is in their best interests to ensure the claimant has appropriate cover in place to remove the risk of the funder being found liable for any adverse costs in event the unsuccessful claimant cannot discharge any adverse costs order made against them.

Whether the funder is assisting the claimant to obtain adverse costs insurance or whether you are seeking a policy independently, here are 5 key considerations to bear in mind:

1. Deferred and contingent premiums continue to be available for good claims. Whilst some claimants may have the funds to pay an upfront or partially upfront premium, either their own or those of a litigation funder, a fully deferred and contingent premium may well be available in the alternative. Whilst the availability of a deferred and contingent premium is likely to depend on the level of cover required, we have negotiated such premiums terms for £multi-million indemnities in respect of a significant number of the biggest cases in recent years.

A deferred premium may appear at first glance to be more expensive than an upfront premium. However, it is still likely to be cheaper than the additional success fee that the claimant group will be paying to the funder if they have funded some or all of the premium upfront. For this reason, it is important the claimant is presented with all of the options.

2. There is ample capacity to be found with reputable providers but there can be, to an extent, a first mover advantage. The adverse costs insurance market, whilst flourishing, is not huge. You can count on fingers and toes the number of insurers that are willing and able to write an ATE insurance policy for in excess of £1m, and each will have an aggregate amount they can reserve in respect of any one claim. It is often necessary to create a line slip of a multiple insurers in order to reach the sort of limit necessary to adequately cover a claimant group in a competition class action.

There will always be the odd occasion when regulatory decisions leading to significant claims create aggregation issues within the ATE insurance market. When this occurs, the first movers may landgrab the available capacity, leaving those that come to the market later potentially facing difficulties in obtaining cover. Whilst capacity issues like this are rare, when they arise, the claimant will face the same challenge irrespective of whether the claimant group approaches all of the relevant insurers directly, through a broker or whether they have been referred to a preferred insurer/s through a litigation funder.

3. But additional capacity may be available at a later date. Notwithstanding point 1 above and in the knowledge that there is always a risk that cover may not be available, additional capacity may enter the market at a later point in the claim – either because new insurers have opened up shop or because the prospects of the case are more certain following the initial investigation. The latter may lead to some of the insurers in point 1 “doubling down” – i.e. agreeing to insurer two separate groups with the same or very similar claims, or because those that were sceptical at first have gained confidence in the claim as time has moved on.

4. It may be possible to ringfence some of the damages to ensure the claimants walk away with a minimum amount even after any funder’s success fee and/or ATE insurance premium has been paid.

5. Having the funder assist with the adverse costs policy will not absolve the lawyer of their SRA duties when undertaking insurance mediation activities. Insurance is, of course, a regulated activity and few funders are FCA regulated nor do they hold the Exempt Professional Firm status that applies to registered law firms. It still falls upon the lawyer to ensure the client is in an informed position with regard to how it will pay its legal fees and they will still need to pay close attention to the obligations imposed by the Insurance Distribution Directive, as incorporated into the SRA Code of Conduct.

One obvious point, but no less vital, is that the ATE insurance policy needs to meet the demands and needs of the claimant group even if they were happy to proceed uninsured but had to obtain the policy solely to provide comfort to the litigation funder as a pre-requisite to their funding agreement.