After the event (ATE) insurance is one of the reasons we can offer our investors a lower-risk version of litigation funding. As well as using lawtech for better claim preselection, we only fund claims backed by ATE insurance. So, what exactly is it and how does it work?
What is ATE insurance?
In any litigation action there is an element of risk. In the UK, if a claimant loses, they will generally be liable to pay the legal expenses of the defendant.
ATE insurance offers litigation claimants protection in the event they lose their claims – the insurance covers adverse legal costs, which include the defendant’s legal fees, disbursements and expenses. For those funding litigation claims, having these policies in place also means funded capital can be protected in the unlikely event of case failure. Ensuring all funded claims have these policies in place means fund capital can be protected in this way.
Unlike before the event (BTE) insurance, which you pay for in advance to protect you against the possibility of a legal dispute arising – as an add-on to a car insurance policy, for example – you can buy ATE insurance when you’re already involved in a legal dispute and want protection from paying your opponent’s legal costs if you lose the action.
In England and Wales, ATE insurance came into use with the Access to Justice Act of 1999. The act replaced civil legal aid with ATE insurance and conditional fee arrangements (CFAs), effectively shifting the cost of providing access to justice through litigation from the taxpayer to the legal insurance sector.
A change came into effect in April 2013, following Lord Justice Rupert Jackson’s reports into civil litigation costs and the resulting 2012 Legal Aid, Sentencing and Punishment of Offenders Act, which determined that all CFA and ATE policy costs must be deducted from the damages awarded to a successful claimant, rather than be recoverable as legal fees.
Q&A with litigation insurance expert Jamie Molloy
We spoke to Jamie Molloy, a leading insurance professional with over 14 years’ experience in the industry, to discuss ATE insurance and the role it plays in the litigation funding market.
Heading up ATE Commercial Risk at BCR Legal Group in the UK, Jamie is involved in managing, administering and underwriting applications from clients, solicitors and insolvency practitioners for ATE insurance and capital protection insurance (CPI). Jamie studied Law at the University of Wolverhampton in the UK, writing his undergraduate dissertation on CFAs and the 2013 Jackson reforms. His postgraduate dissertation was a comparative analysis of litigation funding in the UK and the US.
Why do claimants need insurance? What can go wrong?
Civil litigation cases in England and Wales are subject to a ‘loser pays’ rule pursuant to Part 44 of Civil Procedure Rules (CPR). That is to say, the losing party in the litigation has to pay the legal costs of the successful party. Such costs can be significant and therefore it is always prudent to insure against this risk, regardless of whether the litigant is a private individual of limited means or a large corporate with deep pockets.
In the event someone litigates without an ATE policy, and they either have to discontinue the litigation or they fail at trial, they face a cost risk of tens or potentially hundreds of thousands of pounds.
The problem with a ‘David and Goliath’-style battle is, when you sue the banks or a mass conglomerate, they may intentionally inflate their fees to scare people off. The risk is a huge legal bill and, for many people, bankruptcy.
Ultimately, it’s about access to justice. It’s the ability to litigate knowing that in the event you lose, you aren’t going to face some form of insolvency process, or you’re not going to have to shell out tens of thousands of pounds. ATE insurance is primarily there to provide access to justice.
It also acts as a hedging tool to the big corporates. So, whilst it was primarily for the impecunious, now it is there for big corporates who want to hedge their risk.
If they do have ATE insurance what happens?
If a case is lost and the litigant has ATE insurance, the insurer will indemnify the financial downside.
How does ATE insurance work alongside ‘no win, no fee’ conditional fee agreements (CFAs)?
ATE policies are designed to complement CFAs. In 2000, when the government largely did away with civil legal aid, CFAs coupled with ATE policies were introduced to replace it.
CFAs operate in respect of a litigant’s solicitors fees, whereas ATE operates in respect of the opponent’s costs risk. The idea, in theory, is that you couple a CFA with an ATE insurance policy and the litigant can pursue the claim risk-free.
However, whilst CFAs were forced upon personal injury solicitors, they were never forced upon commercial solicitors. It always was (and remains) at their discretion. So, if you go and see a commercial litigator for advice, they are going to say to you, my hourly rate is between £400 and £800 an hour in central London, and it’s payable – there’s nothing forcing them to operate on CFAs. So, the main methods of funding commercial litigation now are either a private retainer, a CFA or litigation funding – or a blend of all three.
What are BCR doing differently?
Historically, the ATE insurance market has been there for opponents’ costs and the litigation funding market/CFAs to support the funding of own-side costs. However, a huge proportion of the litigation market remains subserviced owing to the cost of litigation funding. So at BCR now we’re also looking at a slightly different product, which we call capital protection insurance (CPI), and it insures the funder’s risk, or the ‘own cost’. By insuring the funder’s downside, they are able to reduce their expected returns, which makes more cases economically viable and increases access to justice.
The concept of insuring own solicitor fees or litigation funder fees is very new. It’s been more widely available in the past two to three years, but it’s still a relatively small market. What we’re thinking is, if you like a case, is there really that much difference between insuring the adverse costs risk or the own costs risk? There isn’t. Not all insurers take that view, but we do.
How does ATE insurance help and protect litigation funders and investors?
England and Wales are subject to the doctrines of champerty and maintenance, which aim to prevent the pursuit of frivolous litigation.
Whilst the historic rules around these doctrines no longer exist, litigation funders are subject to what is known as the Arkin risk, arising from case law, in which the Court of Appeal held that a litigation funder could be liable for the opponent’s costs in any action it funded. This effectively puts the funder in the shoes of the litigant. The rule in Arkin has since been extended in the cases of Excalibur Ventures and Chapelgate.
Accordingly, it is prudent that a funder stipulates to any litigant it supports that the litigant purchases ATE cover. If not, the funder itself could face a significant costs liability if the action then fails.
How do you expect the litigation funding sector will change over the next 5-10 years?
I think there are going to be a number of significant developments in the litigation funding sector in the next five years. One is the increase of litigation funding in both the small-to-medium size, sub-£10-million case sector and also in the mass consumer litigation sector. The second area of huge change is going to be the need for regulation, particularly if litigation funding is going to become more available for consumers.
In the UK, litigation funding is self-regulated through the Association of Litigation Funders, but in Australia they’ve recently started to legislate for litigation funders. As litigation funding becomes more widely available, especially to consumers, you can understand the arguments why that is necessary.
The “investment grade equivalent” of litigation funding
The VWM Capital team brings together leading figures in insurance, law and financial services to offer a new kind of litigation fund.
Alongside our innovative lawtech, ATE insurance plays a big role. By combining these elements, we make sure our investors don’t lose out in the unlikely event a claim is lost.
You can learn more about how VWM Capital works here or read more about litigation funding in our introductory guide.
ATE, BTE insurance – ICLR.co.uk
Access to Justice Act 1999 – legislation.gov.uk
Legal Aid, Sentencing and Punishment of Offenders Act 2012 – legislation.gov.uk
Part 44 – General rules about costs – justice.gov.uk
Association of Litigation Funders – associationoflitigationfunders.com
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