A claimant once approached us when they needed to provide security for costs to the defendant. Not unreasonably, the parties agreed the claimant would provide security for costs in tranches. The claimant arranged for the litigation funder to buy adverse costs cover and a deed of indemnity for the initial tranche of security for costs ordered by the court. The limit of indemnity for the adverse costs cover was then increased each time the court ordered a further tranche of security for costs to be provided. This ‘topping up’ of the cover and providing further security for costs continued until the action proceeded to trial.
Despite the confidence in the case from the legal team, litigation funder and ourselves, the defendant successfully defended the action. In accordance with normal practice, the court ordered the claimant to make a payment on account of costs towards the defendant’s costs, with the remainder of the defendant’s costs to be assessed by the court if not agreed.
The shortfall in the cover purchased was so significant that only approximately 63% of the payment on account of costs ordered to be paid to the defendant by the court was covered by the ATE policy. The impact of this under insurance was immediate because the court order was for these costs to be paid to the defendant within 21 days. There was no cover for the balance of the defendant’s costs that would need to go to detailed assessment.
Clearly, the litigation funder in this action saw the benefit of an adverse costs policy and an anti-avoidance endorsement/deed of indemnity to provide security for costs and avoid having to pay cash into court. This was their motivation for buying cover rather than protection if the claimant lost the action. Had they considered this possibility, they would have bought significantly more cover.
Assume the worst-case scenario
A better approach towards obtaining ATE cover is to assume the worst-case scenario, namely losing at trial, and make a realistic assessment of the exposure to pay the defendant’s costs. This is prudent given the inherent risk in litigation, particularly complex commercial disputes. A cautious assessment of the level of cover needed for the trial should be made. This should provide the insured claimant with sufficient cover should they lose at trial as well as protection for any litigation funder involved in investing in the case (given their exposure to a non-party cost order).
Assessing the exposure to costs for an ATE policy is not a precise science, particularly when assessing adverse costs. As a rule of thumb, using a budget of the claimant’s costs if the action proceeds to trial is a useful basis to work from to assess the exposure to adverse costs. However, this would only hold true if the defendant’s legal team (both solicitors and counsel) have similar hourly rates to the claimant’s. Equally, the claimant’s budget would need to be multiplied to reflect the number of legal teams representing the defendants (where there are multiple defendants).
Furthermore, the limit purchased initially should be kept under regular review. This is particularly important as an action progresses to trial so that if the limit of indemnity needs to be increased, the insurer can be approached in good time.
If you would like to discuss ATE insurance cover, please contact Rocco Pirozzolo at email@example.com.