ABOUT TDM
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Litigation Expense Insurance
In recent years the cost of litigation in virtually any forum has reached the point at which many potential litigants are deterred from taking legal action. At the same time many legal regimes, such as that in England, are seeking to make access to justice easier for the potential plaintiff.
Against this background certain specialist insurers have introduced a range of litigation expense insurance solutions designed to support potential litigants whose legal advisers or counsel consider that they have a reasonable chance of achieving a successful remedy by means of litigation.
There are a wide variety of possible insurances covering a broad range of circumstances but essentially they all divide into two main categories:
- "Before the Event" Litigation Expense Insurances
- "After the Event" Litigation Expense Insurances.
"Before the Event" Litigation Expense Insurances
Before the event litigation insurance is usually purchased on an annual basis or for the period of a specific contract that is being concluded.
The variety of annual insurances speak for themselves in that they provide for a wide range of legal expenses protection for companies and individuals who are either faced with potential litigation or are contemplating litigation against another party. Their most common application is in the area of motor accidents or employment disputes but in addition to these "products" specialist insurance contracts exist, for example, to provide for costs of specialist advice and representation associated with an Inland Revenue investigation following the submission of a self-assessment tax return.
One specialist Insurer ACE Group, working in conjunction with insurance brokers, Willis, have just introduced a new "Contact Enforcement" Insurance Policy that can be purchased by one or more parties to a contract at the time of contracting and it will then provide for the litigation costs associated with having to go to court or arbitration to secure a remedy consequent upon the breach of or failure to observe the terms of the contract by one or more of the contracting parties. The insurance provides for:
"Pursuit Costs"
These are the costs incurred by the Insured party of mounting litigation to enforce the contract terms as a consequence of the breach of or failure of another party to observe the terms of the contract where the Insured party has a reasonable chance of securing remedy as a result of litigation, and
"Defence Costs"
These are the costs incurred by the Insured party (including opponent's costs awarded by the court) of defending litigation brought by a party to the contract with a view to securing a remedy from the Insured party as a consequence of their alleged breach of or failure to observe the terms of the contract.
Such insurance is purchased at the time of contracting and the Insurers will review the contract in question with their legal advisers to ensure that the terms of the contract are fair and appropriate.
If a contract goes wrong it is extremely difficult for the injured party to secure additional finance to pursue the other parties through the legal process. Costs of International Arbitration can run into millions of dollars and the Courts of Arbitration will almost certainly require receiving some form of surety for their costs prior to allowing an action to commence. Such surety has to be secured against the background of a contract, often in the project finance area, having run into problems.
It is much easier to secure additional finance at the contact signing stage in order to purchase Litigation Expense Insurance specifically related to the contract and with a sufficient limit of indemnity to cover any possible costs of litigation associated with enforcing the terms of the contract. An additional bonus of such insurance is the legal review conducted by Insurer's appointed expert at the time of entering into the insurance policy.
"After the Event" Litigation Expense Insurance
Should an individual or company find themselves in a situation where they are contemplating pursuing or required to defend themselves against litigation and they have no or inadequate insurance to meet such costs then they should be considering "after the event" litigation expense insurance. As its name suggest such insurance is only purchased when a specific event has occurred and litigation is contemplated. There are a number of specialist insurers that have developed a range of specialist insurances to meet the needs of potential litigants or defendants in commercial litigation. Many of these have specialized in minor industrial injury cases supported by contingent fee lawyers however one Insurer, namely ACE Group, working in conjunction with the insurance brokers, Willis, have specifically targeted the larger commercial litigation cases where costs and expenses are likely to exceed £250,000.
An "after the event" Insurer studies the circumstances surrounding the proposed litigation and in particular the Counsel's opinion(s). If it can be shown that the party seeking the insurance has a 70%+/- or better chance of securing some or all of the remedy being sought then Insurers will issue a policy that indemnifies the insured party against:
- Legal and related costs incurred by them, and
- Claimant's legal costs awarded against the Insured party by the court, and
- The Premium paid by the Insured Party to purchase the policy of insurance.
This means that if the Insured party is awarded the remedy identified in the policy then they must meet the cost of the policy* but if they fail to secure the remedy all of their costs up to the policy limits of indemnity chosen, including a return of the premium paid, will be payable.
* costs awarded against the losing party can in some instances include all or part of the premium paid for an "After the Event" Litigation Expenses Insurance Policy.
Example
- A Plaintiff is contemplating commencing litigation against a third party who has caused them to suffer damages amounting to £2,000,000.
- In Counsel's opinion the Plaintiff has an 80%+/- chance of success through litigation of securing at least £1,500,000 damages award.
- In the Plaintiff's legal adviser's view the estimated costs of litigation will be £150,000 and the court is likely to award costs of £150,000 to the third party if the Plaintiff fails to prove their claim for damages.
Insurers agree to issue the Plaintiff with a Litigation Expense Insurance Policy as follows:
| Insurance Clause | The policy is to indemnify the Insured for their costs (including the policy premium) and defendant's costs awarded against them by the court should they fail to secure damages of at least £1,500,000 through litigation. |
| Premium Rate | 40% |
| Sums Insured | Insured's Costs £150,000 |
| Opponent's Costs £150,000 | |
| Insurance Premium £200,000 (calculated by applying the Premium Rate of 40% to the total Sum Insured, being £500,000) | |
| Total £500,000 | |
| Premium | £200,000* |
* It is likely that the Insurer will agree to accept the premium payable in installments, for example:
25% payable at inception
25% payable after 60 days
50% payable upon commencement of litigation
The purchaser of the insurance only pays what is due thus if the case settles out of court within 60 days of inception of the policy they will have only paid 25% of the premium.
Conclusion
Litigation Expense insurance will increase in popularity over the next few years since most firms of solicitors are very familiar with these solutions and see it as their duty to advise their clients on the subject of litigation finance and insurance. In addition a range of specialist financiers are entering the field of litigation finance and they require any borrower to put in place insurance to cover any possible loss incurred by the lender should the borrower fail to secure an adequate remedy through litigation and then default on their loan.
