ATE insurance: what is it and how might litigants benefit from its use

After the event (ATE) insurance, otherwise referred to as litigation insurance or legal expense insurance, is an insurance product that can protect an insured party against adverse costs orders and will cover their own disbursements of a proceeding.

When a party loses a court proceeding or arbitration, that party will often face an adverse costs order.  That is, they will be ordered to pay the successful party’s costs and outlays in addition to having funded their own legal costs.  Those costs include the opponent’s solicitors’ fees, as well as other expenses or disbursements associated with proceeding including barrister’s and expert’s fees, court fees and other outlays.  Depending on the length and complexity of a matter, an adverse costs order can often equate to an order to pay millions of dollars to the successful party.  Coupled with the costs to a party in advancing their own case, the financial risk of litigation is significant. 

An ATE insurance policy will provide cover for legal costs incurred in pursuing or defending legal proceedings. It is essentially a risk management tool that allows parties to limit their exposure in the event that they lose their case.

Unlike other policies of insurance where you pay a premium for coverage in the instance of event that may occur in the future, ATE insurance can be obtained at any time after a dispute has arisen, and even after proceedings have commenced.

ATE insurance has been a popular litigation tool in the UK for more than two decades in all forms of litigation, save for matrimonial and criminal proceedings.  Indeed, ATE cover has been so widely utilised in the UK that the Solicitors Regulation Authority requires UK solicitors to advise their clients on the availability of ATE insurance and the England and Wales High Court determined that a solicitor committed a “gross breach” of duty when he failed to advise his client regarding the availability of ATE insurance in Adris v Royal Bank of Scotland Plc [2010] EWHC 941 (QB).

ATE insurance is now starting to gain traction in Australia.

What does ATE insurance cover?

Most ATE policies provide adverse costs cover – covering the insured’s potential liability for their opponent’s solicitor’s fees and disbursements (including counsel’s fees) up to the limit of indemnity – but policies can be tailored to include:

• Insured’s disbursement cover – to cover the insured’s own disbursements including expert’s fees and counsel’s fees.
• Insured’s solicitor’s fees – to cover the insured’s own solicitors’ fees less a deductible (often 25%).
• Security for Costs Cover - often an extension to an existing adverse costs policy used to reduce the financial impact of having to provide security for costs.  It is a cost-effective way of managing cashflow as the premium is typically about 10% of the value of the required security.
• Appeals insurance – available where a case is going to appeal for (a) existing insureds where we provided cover for the trial at first instance and (b) claimants or defendants who were successful at first instance.

When can ATE insurance be used?

ATE insurance can be purchased by either a plaintiff or defendant at any time after a dispute arises.  It is available in most forms of civil dispute, but the UK experience has been that it is most often employed in cross-border litigation and international arbitration.  Such policies are also often used in conjunction with other litigation funding arrangements.

What are the benefits?

Access to ATE insurance in Australia will hopefully assist to increase access to litigation.  It removes the barrier of risk around funding adverse costs orders and a party’s own legal costs in the event of a loss.   It will help to balance out any resource disparity between parties, for example by use of indemnity from the insurer to answer any security for costs applications (which might have otherwise been used tactically by a well-resourced defendant).

ATE insurance may also have tactical benefits.  First, ATE insurers consider prospects as part of any coverage decision and are unlikely to offer coverage in a proceeding with little or very limited prospects (at least without an uncommercial premium).   An opposing party might be inclined to pay closer attention to their own prospects (and, by corollary, those of the insured party) at an early stage of a proceeding, which might incentivise early resolution or narrowing of issues. 

Second, disclosure of the existence of an ATE policy shows that the party is insured against an adverse order assessing costs and so that party’s risk in continuing the case and losing, is reduced

ATE insurance also allows parties to manage cashflow and protect balance sheets and pursue litigation with more confidence by giving certainty around the financial risk.

What are the costs and risks?

The cost of each policy depends upon the nature of the litigation, the risk profile and the potential exposure but as a ‘ballpark’, the UK experience is that the cost of ATE cover tends to be between 20% and 30% of the amount of cover purchased.

The upside is that in most instances, the premium can be tiered or deferred. 

The usual method is a “tiered” or “stepped” premium, whereby the liability for additional parts of the premium is triggered only if and when the case continues beyond certain defined stages.

Another option is a “deferred premium” where the insured is able to defer payment of the premium until the conclusion of the case, thereby providing an obvious cash-flow advantage. Some insurers also offer contingent premiums, whereby the insured is only liable to pay the insurance premium in the event that it prevails in the litigation. This gives the fullest protection to the insured on a loss, in that no further liabilities remain to be paid.

Like any insurance policy, the terms of an ATE policy will need to be carefully considered and scrutinised to understand coverage, exclusions and potential breaches of policy conditions.

As with litigation funders, it is likely that ATE insurers will want varying degrees of involvement in the conduct of the insured litigation including strategy and settlement negotiations. Knowing your rights and the degree of control you will have over your matter will be critical when considering suitable ATE insurance policies.

What is the benchmark for cover?

Because premiums are typically payable at the end of the litigation in the event of a win, insurers will only provide ATE cover where they consider that the insured has a good prospect of success. Insurers will consider various criteria when making this assessment, including the merits of the case and the capability and/or experience of the insured’s legal team.  Insurers will often require a likelihood of success of above 60%.   Insurers will also take more practical considerations into account, such as the ability of the opponent to pay a judgment in the event that the insured is successful.

Will the premium be recoverable as costs of a proceeding?

In the UK, the premium is not recoverable but for a handful of exceptions such as insolvency, defamation, and certain types of personal injury claims. At this stage, it does not seem likely the ATE insurance premium would be costs recoverable pursuant to a costs order. However, if like the UK, Australia adopts the same regulatory obligations on solicitors and uptake of ATE insurance becomes more prevalent, then the premium may become a recoverable cost on an indemnity costs award.

Summary

ATE insurance can be a highly effective tool for parties to litigation to manage financial risk.  It is becoming increasingly available in Australia and is worthy of close consideration by any party facing, or currently involved in, litigation posing significant financial risk. 

Sparke Helmore are well placed to assist clients regarding the benefits and cost of obtaining such insurance.  Sparke Helmore can also assist clients in negotiating the terms of ATE policies with insurers with a view to maximising coverage and minimising financial risk.