UK businesses are braced for a surge in litigation claims as Covid and Brexit have created a perfect storm. Most businesses will get involved in a dispute in the months ahead. These disputes could involve supply chain issues, breach of contract, infringement of intellectual property, data breaches, constructions disputes, employment litigation or any other type of commercial dispute.
Whichever side you are on Claimant or Defendant, litigation carries risk. Not least, the risk of having to pay your opponent’s legal costs if you lose. However strong the legal case there is always a risk of losing.
Under the loser pays principal in English Law the losing party in a legal dispute is usually ordered to pay the winner’s legal costs. These costs can be enormous and can even force a company out of business. It is important to consider mitigating that risk by using forms of litigation funding such as after the event (ATE) insurance.
ATE insurance protects against having to pay an opponent’s legal costs and can help achieve peace of mind. After the event insurance is taken out after a legal dispute starts. Most legal expenses insurance that people are familiar with, tends to be purchased before an event occurs or is even contemplated and may not cover the insured up to the full cost of a claim going to Court.
As with any insurance product, ATE is all about balancing risk and trying to limit a litigants (and their insurer’s) exposure to risk. You would have to put your hand in your pocket to pay the insurer’s premiums but these can often be far lower than the overall costs you would be exposed to without ATE. Not all cases will be insurable but if you have a case that fits certain criteria (such as a case with prospects of success of at least 51%) ATE can be of great help.
There are options available as to how to pay the premium. These options reflect the fact the vast majority of cases don’t lead to trial. One option is a deposit a contingent premium which usually require 18% to 20% of the limit of indemnity to be paid on inception. A further 30% to 40% of the limit of indemnity is only due if there is a successful recovery of the case.
Another option is a staged premium which is usually in 3 instalments. Instalments are only paid if the relevant stage of the proceedings are reached, for example, 12% of the limit of indemnity on inception, 8% when disclosure of documents takes place and 10% to 20% 60 days before the trial. So, if the case settles before an instalment is due no further premium is paid.
What better way to explain after the event insurance than with a real case study of a modern-day David -v- Goliath:
- A clothing company have sold clothes under its trademark brand since 1982.
- A motor manufacturer starts selling clothing in breach of the clothing company’s trademark.
- The clothing company offers the motor manufacturer a licence to use their trademarked name on their clothing range.
- The motor manufacturer refuses and continues to sell clothing using the same name.
- The clothing company has no option but to sue the motor manufacturer for trademark infringement.
- The clothing company knows the motor manufacturer has huge resources and will fight all the way to trial.
- No matter how strong their case there is a risk that the clothing company will lose and will have to pay the motor manufacturer’s costs.
- The clothing company explores ways to limit its financial exposure by taking out ATE insurance. After searching the market and completing an in-depth application process they obtain adverse costs cover which will pay out to cover the motor manufacturer’s legal costs if the clothing company loses.
- The clothing company takes out adverse costs cover in case it loses and has to pay the motor manufacturer’s costs, it opts for staged premiums. The insurers issue what is known as an adverse costs policy.
- As expected, the motor manufacturer fights the case hard. It asks the Court to order the clothing company to put up the funds it would have to pay if it loses the case and ordered to pay costs. This application for a security for costs order is a tactic Defendants often use to put Claimants under financial pressure.
- The Court orders the clothing company to either pay these funds into Court or provide some other form of security. The clothing company does not want to tie up money in Court until the trial ends which could be months or even years away. Instead, the insurance underwriter issues an anti-avoidance endorsement, which this passes the benefit of the adverse costs cover to the motor manufacturer and ensures there are no circumstances under which the insurer will not pay out. This satisfies the security for costs order.
- The case goes to trial and the clothing company wins but the motor manufacturer appeals to the Court of Appeal. The underwriter, who has been working closely with the solicitors for the clothing company the entire way, extends the adverse costs policy to cover the appeal.
- The clothing company wins the appeal. As it wins the case no claim is made on the adverse costs policy but having the cover in place enabled the clothing company to transfer its financial risk and fight all the way to the Court of Appeal.
The above example illustrates how ATE can assist a litigant fight a typical commercial dispute when they find themselves outweighed financially by their opponent.
At LFBB we assist litigants in a wide range of civil and commercial disputes and our litigation team are always willing to discuss potential cases and how best to approach them to achieve your aims. Please feel free to contact us on 0114 272 9721 if you would like to set up a meeting or a call.