Posted by Chris Deadman, director of operations at Litigation Futures Associate Invicta Capital Funding
The recent announcement by Elite Insurance to cease writing new business will have surprised many seasoned watchers of the after-the-event (ATE) insurance market. Elite enjoyed a good reputation as a well-run and experienced participant and, although we can only guess as to the role that its ATE division played in this decision, it should provide litigators and funders alike with plenty to think about.
There is no doubt that the ATE market is a tough space in which to make a profit. Successive increases in insurance premium tax, LASPO and general red tape cannot have helped, but litigators themselves must shoulder part of the blame when we consider why it is so hard to make ATE pay.
In litigating a matter, the lawyer is quite properly concerned with engineering the best financial outcome for his or her client. This means that they are anxious to avoid exposing their clients to unnecessary costs either by way of professional fees or a reduction in damages through payment of an adverse costs insurance premium.
Up and down the country, lawyers are quite properly trying to settle claims before their clients are exposed to unacceptable adverse cost risks requiring insurance cover. ATE insurance premiums are fearsomely expensive, so the argument goes, and the diligent lawyer will do everything he can to avoid his client needing to pay the premium.
This, however, poses a significant problem for the ATE insurer. Premiums will be inevitably high if the only cases the ATE insurer sees are matters which are nearing trial or where attempts at settlement have failed. High premiums are a simply numerical expression of perceived risk.
To employ a clunky example, it’s a bit like proposing to a woman only because your first choice has turned you down. No one likes to be second best. The insurer does not exist to rescue clients whose lawyers have miscalculated. And if the insurer is able to assist, you can be sure that the premium will be commensurately chunky.
The insurer wants a fair crack of the whip across a portfolio of claims. It wants a tolerable number of matters with differing risk profiles, not just the risky stuff. A portfolio containing only ‘Hail Mary’ cases will inevitably attract eye-watering premiums or outright rejections.
If we truly want to see a vibrant and competitive ATE market, and I would argue that it is in everyone’s best interests that we do, then lawyers need to educate clients about ATE insurance at a much earlier point in discussions. Lawyers need to stop thinking about ATE insurance as some ‘get out of jail’ card but rather as a rational response to commercial risk.
This will require better planning on their part in terms of considering litigation outcomes other than the ones they expect. Because, guess what, things go wrong.
By engaging with ATE insurers at a much earlier stage, clients will be rewarded not only with premium levels that reflect the inherent risk but also the comfort that the matter is fully protected against adverse costs risk whenever and however it concludes.
No one likes going to trial, least of all insurers. But obtaining cover for a matter at an early stage means that the insurer is fully committed even if it does proceed to trial and in circumstances where, had they been approached later in the day, they may have declined the risk altogether.