Product Fundamentals: After the Event Insurance
Adverse Costs or After the Event (ATE) Insurance indemnifies the insured against the risk of paying the opposing parties’ costs and expenses in litigation. Some insurers’ appetite may extend to cover the policyholder’s own disbursements (expert and sometimes counsel fees) and in some circumstances their own legal fees. This form of (own costs) ATE is significantly expensive and is subject to limited insurer appetite.
ATE Insurance is primarily used by plaintiffs and is commonly recommended by legal advisors, litigation funders and insolvency practitioners. This form of insurance is unusual in the sense that it provides cover for an event that has already occurred. By contrast, most standard insurance policies look to automatically exclude disputes, circumstances and incidents that have occurred prior to application.
ATE has become more prominent in recent years as the Courts have deemed, in most circumstances, it may form adequate security for costs. In the decision of Petersen Superannuation Fund Pty Ltd v Bank of Queensland Limited (2017) the Federal Court of Australia confirmed that an appropriately worded Adverse Costs or After the Event insurance policy backed by a sufficient unconditional indemnity, could constitute sufficient security for a defendant’s costs.
In this case, the class action proceedings brought by Petersen were funded by a litigation funder, Vannin Capital Operations Limited. Vannin sought to provide security by way of evidence of an ATE insurance policy.
The Federal Court held that the ATE insurance policy in question, which covered the applicant for defence costs, did not satisfy the requirements for security due to insufficient certainty of recovery under the policy. The Court did however state that an ATE insurance policy could provide adequate security if a plaintiff can clearly establish that the policy will be enforceable and will respond sufficiently giving adequate certainty for defendants.
This form of coverage could be considered in a range of cases involving insolvency, construction disputes, negligence (professional and medical negligence), property disputes, probate, personal injury and debt recovery.
The commercial client of an insured solicitor was unhappy with advice received during the purchase of a business and alleged that lack of advice lead to an overpayment of the purchase price for the target business.
The commercial client instigated proceedings against the solicitor firm and sued for its alleged loss. The professional indemnity insurers of the solicitor firm stepped in to defend their insured client.
The plaintiffs’ solicitors obtained, on behalf of its client, ATE cover for the prospective litigation and proceeded to inform the insurers of the defendant solicitor firm that ATE cover had been purchased. Insurers had been informed of the potential purchase of ATE cover prior to inception and were invited to engage in negotiations. Insurers declined the opportunity to do so citing the plaintiffs lack of a case.
The plaintiffs were unsuccessful in their litigation against their former solicitors and ATE Insurance was engaged to pay the costs incurred by insurers in defending the claim against the solicitor. In this instance the ATE cover also extended to include the losing party’s barrister fees. The solicitor for the losing plaintiffs was working on a no win, no fee basis.
ATE Insurance is also used quite extensively by investors/investor companies (as well as creditor parties) against accountancy firms that have given publicly available audit opinions on companies that are in financial distress or are insolvent. It is fair to say that the majority of these kind of cases are settled before litigation is completed. When this happens the ATE Insurance premium forms part of any negotiated settlement.
The use of ATE cover is also prevalent in shareholder actions against solicitor and accountancy firms (and other financial institutions) by the shareholders of an insolvent company that received that professional advice. A recent high-profile case involves shareholders of an insolvent ASX listed law firm suing their audit accountant for misreporting earned income within the business. Insurers of the audit firm are currently extracting funds from ATE insurers to cover security for costs now that the matter has gone to trial.
The process commences with the completion of a proposal form. The case must present at least reasonable prospects of success. A counsel opinion with the completed proposal form is required.
Once furnished with the required information, insurers are approached to gauge their interest. At this stage they will respond with indicative costing.
To formalise quotes, interested insurers will have subjectivities such as additional underwriting information, namely questions about the case/prospects. This may include an additional Senior Counsel opinion and in most instances a conference call between underwriters, their legal counsel, the proposed insured’s firm and their counsel. Following that conference call, underwriters will issue binding quotation terms.
This process takes up to 6 weeks from completion of the proposal form to the date of receiving the binding quotation.
Where a case presents with reasonable prospects, you can expect premiums to be within the vicinity of 20 to 30% of the sum insured (the sum insured is set by the amount of any prospective adverse cost order).
Payment of the premium is staggered. By way of example: (1) a minimum deposit premium of say 40% at the inception of the matter. (2) Once evidence is on, and or mediation is ordered (and there is no successful outcome at mediation), an additional say 25% of premium is payable (3) a final payment would be due say 60 days prior to the commencement of trial.
The precise costing and staggering of premium will vary on a case-by-case basis.
For further information regarding ATE Insurance or to discuss your general insurance needs, please contact us via the form below.