Litigation funding is an agreement between a claimant and a third-party whereby the latter provides the financial resources necessary to pursue a claim in exchange for a share of the damages.
Litigants may receive funding from funders to cover all or part of their legal fees. In most cases, funding is provided without recourse, meaning that if the case is unsuccessful, the funder loses its investment and the claimant owes nothing. Litigation funding can cover all costs associated with the lawsuit, and continental funders typically include an indemnity for adverse cost risk.
In the United Kingdom, however, litigation funding does not indemnify a litigant for the opponent’s legal fees if the suit is unsuccessful. English case law dictates that adverse costs orders can be enforced against both the funded party and the third-party funder. Therefore, most funded litigation cases require an After The Event (ATE) insurance policy to cover adverse costs, whether borne by the funder or the client.
The ATE insurance policy is an agreement between a litigant and an insurance provider in which the insurer agrees to indemnify the litigant for certain legal costs. A policy from ATE can protect a litigant from having to pay the opponent’s fees as well as their own costs of pursuing the claim if their case is unsuccessful. Unlike traditional forms of legal expenses insurance, ATE insurance is taken out after a dispute has arisen, hence the name After The Event insurance. ATE insurance offers claimants the benefit of protection against the financial risks associated with dispute resolution. In some circumstances, there is a special feature in this insurance where most, or all, of the premium, can be deferred and contingent on the success of the case, i.e. it only has to be paid if the insured is successful in the legal dispute and receives compensation for damages. Deferred and contingent premiums are the most expensive ATE policies. If the insured pays some or all of the premium upfront, the overall cost of the premium will be considerably lower.
ATE insurance premiums are often staged premiums where the premium increases in line with the various stages of the litigation with the most expensive being if the case goes all the way to a trial. ATE is cheaper the earlier in the litigation it is put on risk therefore, the later the ATE policy is put on risk the more expensive it becomes. Conversely, it may be difficult or impossible to secure ATE insurance when a trial is imminent, as many insurers refuse to quote within 3-6 months before the trial. If litigation funding is sought, it is highly advisable and often necessary to take out ATE insurance at the same time. This ensures that the costs of the ATE is reflected in the funder’s budget and the insurer’s position in a priority agreement.
Litigating lawyers still perceive ATE insurance as being expensive as the premium cost tends to be a higher percentage of the cover amount compared to other types of insurance. There are a number of reasons for this but one of the leading factors is due to litigating lawyers only obtaining ATE insurance on claims where they believe the case has a strong probability of going to trial, therefore increasing the risk that the ATE insurance will be required to payout. All insurance works on the principle that a majority pools their money to help the minority when it is needed. As an example, if there are 1000 policies and 50 payouts, 5%, the model works fine. If only 100 policies are taken out and 50 payouts, 50%, the price point has to be dramatically increased. To see ATE price reductions will require the market to be taking out more ATE policies thus reducing the percentage chances of a payout.
We believe that as the UK litigation funding market matures and more funders make it compulsory for a claimant to obtain ATE insurance the price point will reduce as there will be more purchases of ATE.
April 5, 2022
Insights
