In a little over two months, on 1 April 2013, many of Lord Jackson's recommendations on reforming civil litigation funding and costs come into force. These reforms include the removal of the ability for a successful party in litigation to recover the cost of after the event (ATE) insurance from its opponent (in addition to the legal costs).
ATE insurance is a type of legal expenses insurance policy which is purchased after a legal dispute has arisen and provides cover for adverse legal costs incurred in litigation, i.e. it protects one party against the risk of it having to pay the other side's legal costs in the event that it loses the litigation. Often the ATE insurance policy also insures the party's own disbursements (such as counsel's fees) and is only payable in the event of a successful outcome in the litigation and at the end of the case. ATE insurance policies are therefore a useful tool in litigation to manage cash flow and overall exposure to adverse costs.
ATE insurance policies are often taken out when the party's advisers are acting on a conditional fee agreement (CFA) – a "no win no fee" basis. CFAs have proven invaluable to parties who may not have the level of funding required for litigation, but they are also widely used by parties in order to manage on-going cash flow, as the party will not be affected by the sometimes unpredictable costs of litigation. This enables the party to more accurately plan and budget. Therefore, due to their compatibility, ATE insurance policies are often packaged alongside CFAs, but can be used strategically where no CFA is in place.
Where a party wishes to take out an ATE insurance policy, an insurer will take into account multiple criteria in deciding whether or not the case is appropriate for ATE insurance. Should the insurer consider a particular case to be high risk with a low chance of success, the insurer will either reject the party's application or significantly increase the cost of the insurance premium. However, even where there is a strong case, the cost of ATE insurance can be significant.
The principal advantage of ATE insurance is that it removes the risk of having to pay the opponent's costs if the party with the benefit of the ATE insurance loses its case. However, should the party taking out ATE insurance be successful in litigation then the insurance premium is, currently, usually recoverable from the other side – meaning there is more recovery on the bottom line for the winning party. However, that is about to change.
Those parties who have a potential legal action and are considering, but have yet to take out, ATE insurance should sign up before 1 April 2013. The cost of ATE insurance policies taken out after that date will not generally be recoverable from the losing opponent and so the potentially significant cost of the ATE insurance policy will have to be paid by the winning party from its own resources (often whether that party makes an actual recovery from the losing party or not). It is therefore advised that companies (and individuals) review any disputes or potential disputes and consider whether ATE insurance could be appropriate. If it is appropriate, act now before it's too late!
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
