At some point, one of your commercial clients will pursue or defend a legal claim. This could be in relation to any one of many legal issues, such as breach of contract, intellectual property rights, professional negligence, insolvency and employment. The list is almost endless.
When disputes start, the legal expenses incurred in resolving them can be substantial and pose a significant financial risk for a business. In the UK (and most other jurisdictions), the legal costs of bringing or defending proceedings are recovered by the successful party from the unsuccessful party. Whether through discontinuance or trial, an unsuccessful party will ordinarily be faced with a potentially catastrophic combination of having to pay damages, their own legal bills, and their opponent’s costs.
Fortunately, they can obtain insurance cover for these costs. Both their own legal costs and opponent’s costs are insurable by taking out after the event (ATE) commercial dispute insurance. This is purchased after a dispute has arisen and protects the claimant or defendant by reducing the potential downside in bringing or defending a claim. The limits of indemnity are tailored to the requirements of each case. Not to be confused with before the event (BTE) legal expenses insurance, which most businesses are likely to have as part of their insurance portfolio, which is unlikely to cover the entirety of a claim.
When a commercial dispute starts, who will your client turn to for advice?
That very much depends on the conversations they have had with you, their broker. You help them manage their business risks and procure insurance for all of their insurable perils. Every other aspect of their business insurance is dealt with by you, so why leave it to someone else when it comes to ATE insurance?
Let’s consider a scenario.
Your client calls to say that they believe a competitor has used their intellectual property. They have already spoken to their solicitor, who feels they have a strong case. The client wants to find out if they have legal expenses insurance to help them pursue the claim. They do, as you have done a thorough job in organising their insurance programme. Still, it’s unlikely the limits are high enough for the case to go to the final hearing if required.
Your client needs to consider how they will fund the costs of the claim and what they are prepared to risk if they lose. There are several options open to them at this point.
If they choose to fund the cost of the claim themselves, they may want to mitigate all, or some, of the risk of losing the case and having to pay their opponents costs, their own disbursements (court fees, solicitors costs, etc.) and their own solicitor’s fees by purchasing ATE insurance. It is likely that their solicitor will provide them with information about litigation funding and tell them about ATE insurance (as they are required to do under their professional regulations), and this is an area where you can assist your client and/or the law firm in arranging a policy.
Anatomy of an ATE policy
ATE insurance can be purchased by a claimant or defendant and can be put in place at any stage of the litigation process. It is available whether the client funds the claim itself, uses litigation funding or enters into an arrangement where they share some of the recoveries with their lawyers in return for the lawyers not charging their full hourly rates (including a ‘no win, no fee’ agreement). There are a variety of premium models available, including deposit and contingent premiums and staged premiums.
Factors that an underwriter will consider before issuing an ATE policy include the limit of indemnity being requested (Harbour Underwriting covers limits ranging from £150k to £20m), whether the prospects of success are better than even and whether the legal team has the relevant experience.
We recognise that ATE insurance is a specialist product and that brokers may need clarification of certain issues. Even where a broker is involved, we would usually speak directly to the law firm dealing with the case, always mindful that the broker retains the relationship with the client.
ATE insurance may also be of interest in relation to D&O cover. With the cost of D&O insurance escalating, some businesses will be priced out of the market or seek to reduce the level of cover. This could leave many directors and senior professionals exposed. ATE insurance could help plug this gap if a claim is made against them.
Adding commercial dispute insurance to your arsenal enables you to maintain oversight of your client’s risk portfolio and demonstrate added value. ATE insurance also presents an opportunity for brokers to work with local law firms in providing this cover to their clients.
This article was first published on 5 February 2021 in Insurance Age under the title ‘In-depth – ATE insurance: Don’t miss out on ATE opportunities‘.