Commercial law's morning after pill

After-the-event insurance is already being linked to conditional fees cases but litigators are ignoring its potential in commercial law, argues Bernard Clarke. Bernard Clarke is underwriting director of First Legal Indemnity.

As a retrospective safeguard policy, after-the-event insurance has been likened to a legal morning after pill. But litigators have proved shy to catch on to it, partly because many link it to conditional fee agreements (CFAs) alone.

True, CFAs can only stand in place of legal aid if after the-event insurance is in place, but litigators should also be aware of the solutions that insurance provides in commercial litigation where there are no CFAs.

The Conditional Fee Agreements Order 1998 came into effect on 30 July this year and brought all proceedings except criminal and specified family cases within the scope of Section 58 of the Courts and Legal Services Act 1990.

The profession has been slow to take on CFA work and will probably be as reluctant about conditional fee work in large scale commercial litigation, mainly because of the ban on billing for hefty slices of work in progress.

But lawyers should look for ways to solve this problem. A look at the positive side of conditional fees in commercial litigation – a hike in success fees of up to 100 per cent (on top of basic costs), and the knowledge that insurance can recover some fees in a no win, no fee situation – is enough to convince most lawyers that CFAs are worth investigating.

Security for costs is just one good example of the use of after-the-event insurance where no CFAs are used. The court is not obliged to accept as security for costs a policy which insures the defendant's costs if the plaintiff fails to win. It is under a duty to exercise its discretion and take all circumstances into account. But assuming that insurance cover is not illusory or inadequate, the court will see it as additional to available assets and as protection to all parties in the litigation.

Another point often overlooked is that after-the-event insurance to cover defendants' costs is a helpful weapon when negotiating. It allows the plaintiff to say that an independent assessment of the case's merits has been made and that the insurers (who have no interest in overstating the merits) are prepared to issue insurance.

This represents a form of endorsement – the insurers have confidence in the plaintiff's claim. Conversely, a defendant may be able to draw conclusions if a plaintiff has not secured a policy – have the insurers refused to underwrite the risk and if so, why?

Naturally, law firms must tread carefully to ensure the proportion of work using CFAs does not stray too high. They must set a limit on the number or size of conditional fees cases to cap any potential financial loss. And they must also consider insuring against failure to recover costs in the event of a no-win outcome.

Barristers who undertake CFA work should also consider insurance to protect against failure to win. Policies are being developed that give a guaranteed flow of income for a case, win or lose.

This is just as well because for many barristers it is simply not viable to wait for the outcome of a case before discovering if they will recover a fee. After all, a possible success fee in 18 months' time does not pay today's mortgage. Alternatively, barristers' fees can be insured as a disbursement and paid by the insurers if the plaintiff loses.

Once larger firms take on commercial litigation using CFAs, market pressure will force other firms to follow suit. And regardless of the reluctance of solicitors and barristers to do large-scale commercial litigation using CFAs, clients will demand it.

Lawyers must grasp that after-the-event insurance offers innovative solutions to litigation problems, whether or not a CFA is in use.

Of course, any policy must be scrutinised (exclusion clauses in particular) and carriers should be sounded to check that they are creditworthy. But insurance as an alternative to a security for costs payment into court should be considered in every case.

Most solicitors will feel it appropriate to advise clients of its availability, particularly if, as seems likely, the premium will be recoverable from the defendant as part of the plaintiff's claim.