Has your legal expenses insurance got you covered?
Companies facing possible commercial litigation have to weigh up the costs and benefits of taking their claim to court. One risk is that the losing party is usually ordered to pay their opponent’s costs.
We can help you to find insurance to cover this risk and, in many cases, the premium is not payable until the end of the case. This can tilt the balance in favour of proceedings and “getting justice”. Insurance taken out after a dispute has arisen is known as ‘after the event insurance’, or ATE. It can help in a number of circumstances.
A company with limited resources, X Ltd, may bring a case, knowing that it cannot afford the defendant’s costs if it loses. The defendant may be rightly outraged: “When they lose they will just go into liquidation and leave us unable to recover costs. We are on a hiding to nothing. Where is the justice in that?”
The court rules recognise that this could be unjust, so they give judges discretion to order that companies have to give “security for costs”. This requires X Ltd to demonstrate that it can pay the defendant’s costs, normally by paying money in to court. If X Ltd has few resources then this order alone could end the case.
At this point, X Ltd may well feel aggrieved. “We haven’t got to trial, but we have to fork out for our opponent’s costs as if we’d already lost; that’s going to cripple our cashflow”. The court has to balance all of the circumstances, including this possibility. Other points are whether X Ltd’s case appears strong or speculative, and whether the defendant’s conduct apparently caused X Ltd’s financial problems. A security for costs application can be a hard fought preliminary battle that might decide the whole war.
Traditionally, where X Ltd has ATE insurance this alone would demonstrate its ability to pay costs. The parties could get on and fight their dispute on its merits.
More recently there have been several cases scrutinising ATE policies. Defendants have effectively argued that insurers are slippery creatures who always try to escape liability under their policies.
In late 2018 the Court of Appeal (Premier Motor Auctions –v- Price Waterhouse Coopers) ruled that the court should look line by line at the ATE policy and scrutinise the circumstances where the policy was taken out. It should look at the theoretical possibilities that might cause the insurer to avoid the policy. With these factors in mind, the court ordered Premier to pay money in to court. The ATE policy was not sufficient.
There has been a string of cases since then where the court has looked line by line at the detail of each ATE policy. In one (Bailey –v- GlaxoSmithKline UK Ltd), the court concluded that there was no reason to believe that either the insurer or the claimant would avoid or invalidate the policy, but nevertheless looked at theoretical possibilities and discounted the value of the policy by one third. This meant that Bailey had to pay one third of the likely costs into court. Of the recent cases this is probably the most sympathetic to ATE policies- others have been harsher.
My view is that this approach is misguided. There is not an insurance policy in the world that does not include limitations and exclusions. Look at your motor policy. However, that does not mean that you have to ask judge to decide whether the policy is likely to be avoided every time you go for a drive. In reality insurance does provide genuine cover in all but exceptional cases. Courts should not start by assuming that every case is exceptional.
As things stand, defendants now have licence to scrutinise these policies, point out any possible loop-holes and to argue in court they might be left unable to recover costs. Indeed, it would be negligent for a defendant’s solicitor to miss the opportunity. Rather than a quick exchange between solicitors where the existence of an ATE policy is established and the parties move on, both sides will be faced with a long, complicated and expensive hearing in court over technicalities of an insurance policy that has nothing whatever to do with the merits of the actual dispute between the parties.
It may be that the ATE market will develop policy wording that is accepted by the court for this purpose and then all insurers will follow suit. It will doubtless make insurance more expensive, but we can then go back to the simpler times. Until then, however there will be many unnecessary battles fought and this may tip the balance away from getting justice done.
Stephen Allen, partner