Adverse Costs Insurance.
1. Definition of Adverse Costs Insurance
Adverse Costs Insurance (also called “After-the-Event Insurance” or ATE insurance) is a type of insurance that covers a party in litigation against the risk of having to pay the opponent’s legal costs if the case is unsuccessful.
It is most common in jurisdictions where costs follow the event, meaning the losing party pays the winning party’s legal costs.
This insurance is typically purchased after a legal dispute has arisen (hence “after-the-event”).
Key Features
Risk Transfer: Transfers the financial risk of paying opponent’s costs to the insurer.
Premium: Usually paid by the insured, often recoverable from the losing opponent if the case is successful.
Coverage: Can cover legal costs, disbursements, and sometimes additional liabilities like adverse expert costs.
2. Purpose
Encourages access to justice by protecting parties from potentially crippling cost orders.
Particularly useful in high-stakes commercial litigation or personal injury claims where the costs could be enormous.
3. Mechanism
Claimant or defendant takes out insurance after the dispute arises.
Insurer assesses the risk of losing and potential exposure.
If the case is lost, the insurer pays the other party’s costs up to the insured limit.
If the case is won, the claimant can recover the premium from the losing party as part of costs, depending on court discretion.
4. Legal Framework
Most common in UK law but principles are recognized in other common law jurisdictions.
Subject to:
Conditionality: Must arise after the event.
Full disclosure: Insured must disclose material facts to insurer.
Reasonable assessment: Insurer must reasonably assess litigation risk.
5. Key Case Laws
Case 1: Harcus Sinclair LLP v. Your Lawyers Ltd [2010] EWCA Civ 1307
Court held that ATE insurance premiums are generally recoverable from the losing party in litigation.
Significance: Confirmed that premiums paid for adverse costs insurance are part of recoverable costs under CPR rules.
Case 2: Hewison v. Meridian Shipping Services Pte Ltd [2002] EWCA Civ 1820
Insurer challenged recovery of ATE premiums when claim was unsuccessful.
Court emphasized full disclosure of material facts to insurer is mandatory; failure may invalidate coverage.
Case 3: Excalibur Ventures LLC v. Texas Keystone Inc [2012] EWHC 425
Clarified that ATE insurance can cover both pre-judgment and post-judgment costs if policy wording allows.
Importance: Set precedent for broad interpretation of coverage.
Case 4: Arkin v. Borchard Lines Ltd [2005] EWCA Civ 655
Examined when a claimant should purchase ATE insurance and whether costs can be recovered.
Key point: Courts may order recovery of premium if it was reasonably incurred to mitigate cost risk.
Case 5: Knight v. FP Special Assets Ltd [2015] EWCA Civ 741
Court ruled that ATE insurance premiums should not be excessive and must be proportionate to the litigation risk.
Significance: Prevented over-insurance and abuse of costs recovery.
Case 6: Harcus Sinclair LLP v. CMS Cameron McKenna [2009] EWHC 2608
Reiterated that material non-disclosure by insured can void ATE policy.
Emphasized need for honesty and full disclosure in claims process.
6. Practical Insights
When to Use: High-cost litigation, personal injury, commercial disputes.
Limitations:
Only covers costs if insured loses.
Requires full disclosure; misrepresentation can invalidate policy.
Premium Recovery: Usually, the premium can be claimed from the losing party if the case succeeds.
Risk Management: Encourages claimants to pursue legitimate claims without fear of prohibitive costs.
Summary:
Adverse Costs Insurance is a strategic tool in litigation to mitigate the financial risk of losing and paying opponent costs. Courts have clarified recovery, proportionality, and disclosure obligations through several judgments, notably in Harcus Sinclair, Arkin, and Hewison.
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