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What is adverse costs insurance?

Adverse costs insurance is a type of insurance purchased by commercial claimants who are bringing a legal claim whether in courts or in an arbitral forum. The policy covers risk of having to pay the opponent’s costs in the event the claim loses.

What do we mean by ‘adverse costs’? 

Adverse costs are the amount a successful party can claim from the unsuccessful party to reimburse them for the legal costs they have incurred during the legal dispute. 

Adverse costs does not include damages awarded or any other amount ordered by the court to compensate a winning party. Adverse costs is limited to legal costs. 

What does it cost? 

There are several ways in these insurance premiums can be structured, depending on the type of case and the limit of cover required, which include the following:

In the majority of cases, the premiums are contingent upon success. This is a fundamentally important distinction between adverse costs insurance and other forms of insurance. The Insured only pays the premium (or some part of it), if the threshold for Success, as defined in the policy, is met.

This has two major benefits for businesses considering adverse costs insurance. 

Firstly, it means there is no cash call to start the cover because the premium is only payable at the end when the outcome of the case is known. 

Secondly, if the case is lost, the Insured can make a claim on the adverse costs policy without having to pay a premium – because the premium is only payable on Success.

Moreover, some insurers go as far as to say the premium is only payable to the extent that there are sufficient proceeds from which to pay the premium to the insurer. This protects policyholders from owing more to the insurer than they were notionally entitled to in cases where the proceeds are ultimately disappointing compared to original expectations.

When should an application for adverse costs insurance be made?

Adverse costs insurance can theoretically be purchased at any stage in the litigation process but it is usually purchased before any significant legal costs have been incurred. Most commonly purchased at the point a claim is about to be notified to a court or arbitration.

Whether or not it is better to apply for adverse costs insurance early in the process or later in proceedings is a case-specific question. Our brokers can help explain the pros and cons over the timing of any application within the context of the case.

For instance, some cases will not attract competitive quotations from the market unless key information, such as expert reports on critical issues of liability or quantum, have been obtained.

Depending on an insurer’s appetite to cover the case, it is possible to obtain retrospective cover for adverse costs already incurred prior to making the application. .

Who makes the application – the client, or the legal representative’s acting for the client?

The policies are taking out in the name of the business bringing the legal claim. However, it is strongly recommended that the application (including the application form) is completed by the instructed legal representative on the applicant’s behalf. This is because the legal representatives will more readily be able to answer the technical questions asked by the insurance underwriters but also because legal representatives are considered to be more objective in answering questions about the merits of the claim than the business seeking the cover.

Legal representatives with questions about adverse costs insurance cover,  the application process or best practice when making an application should contact our experienced broking team to provide answers tailored to the situation.

What are the advantages of adverse costs insurance?

The main purpose of adverse costs insurance for a business is that it removes the risk of having to pay the opponent’s costs. However, with the insurer’s consent, notifying the opponent of the existence of the insurance can strengthen a case in the eyes of the opponent. This is because they will be aware that the insurer will have carried out their own assessment of the merits of the case before issuing the policy. This can lead to improved settlement leverage.

TheJudge have been specialists in after the event insurance for over 20 years in the UK where the product first appeared. Now TheJudge have offices in the Germany, UK, USA and Canada where we negotiate coverage and premium options to meet the needs of our clients’ specific circumstances.