Adverse costs and insurance

Litigation finance is increasingly attractive to companies of all shapes and sizes. Whereas once the typical customer was impecunious or had become fatigued by the ongoing costs of litigation, large and solvent businesses increasingly seek out financing as a means of moving litigation spend off balance sheets, and thereby of avoiding a negative drag on profits.

How lawyers’ bills will be paid is a top-of-mind subject for many GCs, but they may be slower to consider the other side of litigation cost: What happens if they lose? In Europe, the UK and much of the common law world, the principle is that the loser in litigation will pay the winner’s costs. The case that a rational claimant is looking to bring will be one it views as strong, but there is no such thing as a sure-fire winner; unexpected evidence may emerge, and judgments can sometimes go against even the most prepared of legal teams. It’s one thing to not receive the damages you were expecting for your case, but to be faced with a significant bill for the other side’s cost at the same time rubs salt into the wound.

Adverse costs risk in the UK has far outstripped inflationary increases in the last ten years. In the RBS Rights Issue litigation, RBS’s costs estimate^[1] for the liability phase was £90 million, and whilst that is a truly exceptional number, £5 million for the costs of a defendant to trial is not seen as ridiculous. In a case where there are multiple defendants (either at the claimant’s choice or added in under the Part 20 procedure), one can simply multiply the exposure, meaning potential adverse costs in a cartel or antitrust matter could easily hit £20 million.

It takes a very well-capitalized business with significant risk tolerance to take this risk on its own balance sheet. Fortunately, there are solutions provided by insurance mechanisms. So-called After-the-Event insurance (ATE) cover can protect a claimant against adverse costs risks, including some of the risk of the costs of interlocutory proceedings. Terms are generally bespoke, but most insurers recognize the need for the premium to be tied in part to the success of the claim. This means that there may be a small upfront premium (which can be paid by a funder) with the majority contingent on the claims success—meaning that the insured claimant is trading part of their damages for the removal of an unpleasant bill in the unsuccessful case.

Where a funder has been engaged, then the principle established in Arkin v Borchard Lines^[2] can make the funder liable for the same amount in adverse costs that it has funded to bring the action. The funder will require either a solution to defray this, be it from client or insurance, or will need to take an additional slice of the proceeds from the claim to take this risk on its balance sheet.

ATE can also help a claimant deal with the risk of a security for costs application. This allows a defendant to ask for the claimant to deposit money with the court as the case goes on to ensure that they have some certainty that they will get their costs if they win. In part this allows a defendant to deal with genuine concerns when sued by a smaller business, but the process can also be used as an early way to block litigation, where a claimant simply cannot pay a few million pounds into court. Increasingly, ATE insurance from reputable and well-capitalized insurers is accepted by the courts^[3] as an alternative to the need for a claimant to part with money.

Burford works with clients to manage adverse costs exposure through a range of relationships with ATE insurers, and can help ensure that downside risks are protected in a way that allows claimants to focus on the substance of their cases.

[1] Tabby Kinder, HSF to Charge RBS £90 Million for its Defence in £4 Billion Shareholder Battle, The Lawyer (Sep 21, 2015), available at http://www.thelawyer.com/issues/online-september-2015/hsf-to-charge-rbs-90m-for-its-defence-in-4bn-shareholder-battle/.

[2] Arkin v Borchard Lines Ltd & Ors, EWCA Civ 655 (Eng & Wales App 2005).

[3] Premier Motorauctions Ltd & Anor v Pricewaterhousecoopers LLP & Anor, EWHC Chanc 2610 (Eng & Wales 2016).