Over the past year, an increasing number of litigation insurers have extended their coverage to include own-costs cover. James Delaney looks at what this means for the industry
A multi-million dollar shareholder dispute involving the development of the first, and now one of largest, mobile telephone companies in Afghanistan – Afghan Wireless Communications Company (AWCC) – is currently making its way through the English Courts. Claimants Lord Michael Cecil, Stuart Bentham and Alex Grinling are understood to have in place one of the largest after-the-event (ATE) insurance policies ever written, covering their own solicitors’ fees and disbursements as well as adverse costs. The claim, which is being pursued by US firm McGuireWoods, and its innovative utilisation of ATE insurance, is evidence of the UK’s maturing funding market.
The claim relates to the failure of the defendants to issue the claimants with shares in AWCC’s US-based parent company Telephone Systems International (TSI), which the defendants allegedly agreed to do in exchange for the funding and expertise provided by the claimants in developing AWCC’s business. Were it not for the willingness of underwriters to insure a significant proportion of McGuireWoods’s fees, in addition to adverse costs and own disbursements, the claimants would never have been able to pursue their claim.
The case is a prime example of a trend for ATE providers offering own-costs cover that has emerged over the past 12 months. While this has long been viewed as the core domain for third-party funders, a number of the leading litigation insurers are extending their coverage beyond the traditional adverse costs and own disbursements cover.
This may come as a surprise to many lawyers, who still refer to ATE insurance as “adverse costs insurance”. This is misleading as, in fact, most policies will extend to insuring disbursements and counsel’s fees on a standard basis. However, it would appear that few fee-earners are aware that insurance can be extended to cover own solicitor’s fees in addition.
The vast majority of the terms we’ve secured for big-ticket cases will often include a proportion of own solicitor’s fees cover. This is a result of the fact that many City firms will not entertain a CFA (or full CFAs at least) for such cases and that the fees associated with third-party funding can still be too great a cost for some clients to accept. The insurers’ willingness to insure own fees, or a proportion thereof, significantly increases the flexibility that can be applied to structuring a cost-effective solution for the client.
Some may argue that third-party funding is the sole answer to the own-fees dilemma, however. Conversely, it’s important for the lawyers to inject a sense of realism for their clients, whose ultimate goal must surely be to maximise the ultimate recovery.
By way of example, let’s assume the following: a client requires £3m of own solicitors fees cover (in excess of any amount the lawyers might be prepared to put at risk under a partial CFA). The client’s basic options might typically be:
– to self-finance
– to enter into a damages-based agreement with a third party funder
– to obtain ATE cover for the £3m
Even on a conservative basis the funder in the second option is likely to expect a return on investment in the region of 2.5 times – £7.5m – to carry the risk on the client’s behalf. However, because the insurance follows the same pricing methodology for own fees as it does for adverse costs, a client may well be able to secure the £3m hedge for around £1.5m with an insurer and with a deferred and contingent premium. That’s £6m cheaper than the funder. Of course, some may shout that the insurer is only providing an indemnity in the event that the case loses and is not pumping in the interim cashflow. While this is true, when one considers the extra £6m cost saving to the client it’s obviously prudent for lawyers and their clients alike to be creative as to how the cashflow requirement could be satisfied given the insurer is actually bearing the risk of failure.
I would stress that the above is not intended to be anti-funding; far from it. In many instances third-party funding could be the only viable bridge for the client but it’s certainly a dangerous approach to assume that it ought to be the primary consideration to the exclusion of all others. After all, what happens when a client wins their case with the stark reality of giving up a multiple of 300-400 per cent, coupled with a realisation that actually it might have been possible to structure a package at a significantly reduced rate?
The dynamic between funding and insurance for own costs arguably represents the next step in the evolution of the litigation risk transfer market.
James Delaney is a director at TheJudge, Litigation Risk Transfer Brokers