After The Event insurance (ATE insurance), also known as adverse cost order insurance, is a common feature of class actions in the United Kingdom. To date ATE insurance policies have not been widely utilised in Australia,1 however at least one large insurance broker is now advertising ATE insurance products in the domestic market.
What is ATE insurance?
ATE insurance is a form of legal expense insurance which protects the insured against the risk of an adverse cost order in the event that the insured becomes involved in litigation. Unlike traditional insurance which is obtained prior to the event occurring, ATE insurance is purchased by a party once a dispute has arisen or specific proceedings are contemplated. If the insured is successful in their action and do not have to pay costs, the policy is not triggered. However, if an adverse costs order is made against the insured, the policy will cover the insured’s exposure to the adverse costs order.
ATE policies typically cover any adverse cost order awarded against the insured plus the insured’s own disbursements. The insured’s own legal fees are not usually covered. This aligns with the trend that most actions involving ATE insurance are also subject to conditional fee agreements (CFAs) or Litigation Funding Agreements (LFAs) under which the litigant is not liable for their own legal fees if they are unsuccessful in the action and the fees are deducted from the award if they are.
The premium charged for ATE insurance is typically 20 to 40% of the policy indemnity limit.2 Payment of the premium is typically deferred pending the outcome of the case, with the premium only payable in the event of the case being successful.3 However, there is a re-emergence in the UK of ATE insurers requiring payment or part-payment of the premium when the policy is taken out. Where a claim is successfully settled for a sum (without or including costs), any ATE premium due will be payable to the insurer.
ATE insurance in a class action context
In the UK, ATE insurance has been used in conjunction with LFAs to run representative actions (a true “class action” regime has been recommended for competition law claims only). A LFE is an agreement under which a third party funder pays the plaintiff firm’s fees for the conduct of the representative action in exchange for a percentage of the award. In the class action context, LFAs take the place of individual CFAs and address the liability of the plaintiff of the class for their legal costs. As with individual actions, the potential liability for adverse cost orders are covered by ATE insurance.
In the UK most litigation funders require class members to have ATE insurance to cover the funder’s exposure to adverse cost risk.
The UK experience with ATE insurance
The introduction of ATE insurance in the UK arose out of access to justice reforms.
In 1996 the Access to Justice Report4 highlighted a lack of proportionality between legal costs and legal claims. There were concerns about the reduction of legal aid for civil claims and the effect of this on access to justice. While CFAs and LFAs existed to cover a litigant’s own costs, the threat of liability for the other side’s costs remained a deterrent to litigation. The solution was to enable a litigant to insure against the risk of having to pay adverse costs and their own disbursements.5 The UK government consulted the insurance industry to have role in addressing this risk which resulted in the introduction of ATE insurance.
In the early days of ATE insurance in the UK, the policies were unpopular. Litigants were not prepared to pay for the cover as it was not recoverable. In 1998, provisions for recovering ATE insurance premiums paid by the insured as a component of costs where the litigant was successful were advanced in the Access to Justice with Conditional Fees consultation paper released by the Lord Chancellor, Lord Irvine. The case in favour of recovery was advanced on the basis that the premium cost was incurred as a result of the unsuccessful party causing the successful party to incur the cost of the proceedings. In 1999, theAccess to Justice Act 1999 was enacted to expand the scope of what was previously recoverable from a losing party with ATE insurance to include any premium paid by the successful party for their ATE insurance.6
Rising costs and premiums
As a result of these reforms, by 2004 there were 60 providers of ATE insurance in the UK7 and premiums had increased significantly. With the combination of CFAs or LFAs and ATE insurance, cases could be brought at no financial risk to the litigant. In December of that year, the UK Office of Fair Trading announced a review of the liability insurance market. The Office of Fair Trading expressed concerns that ATE insurance combined with CFAs were contributing to rising legal costs, which in turn were contributing to rising liability insurance premiums.
In 2012 the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (UK)8 repealed the Access to Justice Act 1999 (UK).9 Under the reforms, for any ATE insurance policy entered into after 1 April 2013, the policy premium was no longer recoverable, except in certain limited circumstances such as insolvency, defamation proceedings, mesothelioma claims and for initial expert reports on liability and causation in clinical negligence claims.
For policies which did fall within an exception, the losing insured party may challenge the reasonableness of the premium. To the extent the Court finds that the premium is unreasonable,10 the successful party will be liable for the shortfall.
Access to justice?
While ATE insurance was introduced in response to concerns about access to justice, it has been criticised for failing to achieve this outcome. The key criticisms of the UK experience have been that plaintiff lawyers, litigation funders and insurers are all selective in the cases which they take on. Cases which have merit may not be accepted if they do not meet profit requirements or investment criteria.
The second key criticism is that the benefits of CFAs or LFAs and ATE insurance are minimal and that the access to justice benefits should not be overstated where the real motivation of the system is financial. In the UK, the proportion of funded vs non-funded litigation in the courts is low so the impact on access to justice is modest at best.11
Likely ATE landscape in Australia
If ATE insurance becomes widely available in Australia, it will be likely that, based on the UK experience, litigation funders will require class members to have ATE insurance to cover the funder’s exposure to adverse cost risk. Currently, adverse costs orders act as a deterrent to plaintiff firms (or the litigation funder depending on the funding agreement) against bringing claims with weak prospects. As ATE insurance provides a mechanism for a plaintiff firm to bring an action with the knowledge that any costs awarded against the insured plaintiff class will be paid by the after the event insurers, it follows that once the adverse cost deterrent is removed, more plaintiff class actions may be viable. We believe that ATE insurance will be welcomed by plaintiff firms as it will make a higher percentage of potential class actions viable than at present.
If Australia adopts the current position at UK law by which ATE premiums are not recoverable, it is possible that we will see different products or pricing models come to market. For example, staged pricing and flexible payment options such as the utilisation of lower premiums combined with higher excesses could be developed. However, in the case of high value class actions, we anticipate that even in the absence of an ability to recover premiums paid, the demand for ATE insurance will not be affected.
It is also possible that ATE will be re-positioned as a funding option independent of litigation funding. Currently ATE insurance is considered as linked to LFEs or CFAs but given the high value of some class actions it may be viable for plaintiff firms to absorb the cost of the legal work themselves if they can manage the risk of adverse costs order and disbursements with ATE insurance.