From mad March to adverse selection April?

Are you comparing apples with apples on the ATE front?

Posted by Fallon Turner of Litigation Futures sponsor TheJudge

During the latter part of February 2013 and throughout the whole of March, we at TheJudge, together with all of the litigation funders and insurers with which we work, saw an exceptionally large surge of applications for after-the-event (ATE) insurance and third-party litigation funding.

As a result, literally thousands of policies were written in the last few weeks of recoverability, with many ATE insurers having teams in place until midnight on Sunday 31 March to process last-minute applications and policy acceptances. Not only did we have brokers working over the weekends throughout March to cater for the additional workload, but we also invited litigation insurance underwriters into our offices to speed up the decision-making process.

All in all, it was an extremely successful, although extremely hectic, March and I think it’s safe to say we’ll never again see such a huge volume of cases in such a short period of time.

As our director James Delaney explained recently, the quality of cases which we saw during March was a lot higher than expected. However, this could be down to the fact that the lawyers had not had the luxury of trying to settle the case ahead of applying for cover or indeed using ATE quotes as leverage to try and initiate a settlement.

In other words, the ATE insurance market suffered less adverse selection during February and March 2013 than in a ‘normal’ month. The implications of this way of thinking for the future depends on how litigators now respond to the post-Jackson ATE insurance market.

It’s important to remember that leaving all litigation insurance applications until all settlement attempts have failed will inevitably increase the price of premiums, meaning clients lose more of their damages. Routinely using funding products such as ATE insurance and litigation funding will keep the cost more palatable to clients, meaning more benefit from retaining increased proportions of damages.

Whilst most ATE insurers remain committed to the litigation insurance market, there is no doubt that the landscape will change. With ATE insurance premiums no longer being recoverable from the losing party, clients will be liable to pay their own litigation insurance premium either at the outset or from the damages and/or costs recovered at the conclusion of the dispute. As a result, it’s becoming increasing important to really understand a client’s expectations and abilities in relation to premium payment.

Historically, the trial stage premiums for commercial cases have fallen somewhere between 40% and 60% of the sum insured, with discounts applying in the event of an early settlement. While many industry experts agree that premiums should come down, as the emphasis really is on price, underwriters – similar to litigation funders – will of course take a much keener interest in the ratio of cover required to the anticipated damages to ensure that the case is proportionate and can stomach an ATE insurance premium.

This will certainly bring about a real shift in the way ATE underwriters consider and price applications for litigation insurance but specific information on the new products is either not yet forthcoming for many insurers, or (perhaps understandably) presented in a confusing way meaning it is very tricky for lawyers to be able to compare apples with apples, when advising clients on the funding options available.