After the event insurance - a new option to reduce litigation risk?

The Court of Appeal’s recent decision in Houghton v Saunders [2019] NZCA 285 indicates that litigants in New Zealand may be able to benefit from an After the Event costs insurance policy (ATE policy). This may increase litigation before the courts, as litigants can issue proceedings with insurance against the risk of large adverse costs awards.

After the Event policies have long been available in England, but they are not part of the New Zealand litigation landscape. The Court’s decision highlights that they are available and acceptable, although they do not provide all of the benefits provided when first offered in England (discussed below). If the policies become widely accepted in New Zealand, this may change the way people approach litigation and assess litigation risk – and a rise in litigation is likely.

An ATE policy is insurance that protects a litigant (normally a plaintiff) against the risk of an adverse costs award if the litigant loses the case. In return for a premium, the insurer assumes the risk of a costs award against the litigant. This allows plaintiffs to bring proceedings without the risk of incurring a costs liability if they lose, in addition to their own legal costs. When ATE policies first became available in England, the courts allowed successful plaintiffs to include the cost of the ATE premium as a disbursement, so that the policy was effectively free to the plaintiff if they won the case and it protected them if they did not. Now, however, the rule has changed and a plaintiff must bear the cost of the ATE premium itself.

Background to ATE policies

ATE policies, unlike most forms of insurance, are purchased once a dispute has arisen or proceedings are contemplated. If the insured party is successful in the action and does not have to pay costs, the policy is not triggered. However, if the insured party loses and an adverse costs order is made against it, the policy will cover the insured party’s exposure to the adverse costs order.

Subject to variations and exceptions on a case by case basis, the following is an outline of the basic principles upon which an ATE policy works:

(1)        Cover is triggered when an insured party loses litigation.

(2)        It usually covers:

(i)         adverse costs orders requiring the insured party to pay the winning party’s costs;

(ii)         the insured party’s own disbursements; and

(iii)        a portion of the insured party’s lawyer fees.

(3)        The insured party could be bringing or defending the claim, but is normally bringing it.

(4)        An ATE policy is available in theory regardless of the subject matter of the civil dispute and regardless of the type of relief or remedy being sought (monetary or otherwise).

(5)        The main requirement for obtaining an ATE policy is to satisfy the insurers that the insured party’s chance of success on the merits of the case is at least 60 percent (this minimum threshold can be higher) and that the insured party will be able to pay the ATE premium if required to do so.

(6)        The ATE policy premium, often between 20% and 50% of the amount of costs being insured, may be “deferred and contingent upon success”. This means that the insured party need not pay the premium up front and is only liable to pay it if it wins the case.

If the insured party loses the case, there is no premium to pay and the insurer pays out any court costs and disbursements under the policy.

(7)        The level of premium can also be staged, increasing in amount the further the litigation/arbitration progresses, so that if the case settles early, a lower premium is payable.

England’s approach to recovering

In England, a winning insured party was initially entitled to recover ATE policy premiums from the losing party as a part of the costs award under the Access to Justice Act 1999 (UK) (AJ Act), meaning that insured parties were able to litigate essentially risk free in terms of costs awards.

This principle originated from the argument that the ATE premium cost was incurred as a result of the losing party causing the winning insured party to incur the cost of the proceedings. Where they had lawyers willing to act on a ‘no win no fee’ basis, or a litigation funder, they had no risk at all.

This changed when the Legal Aid Sentencing and Punishment of Offenders Act 2012 (UK) (LASPO) came into force on 1 April 2013. The LASPO repealed the AJ Act which allowed a winning insured party to recover ATE premiums from the losing party. Prior to this, there were growing concerns that ATE insurance was partly responsible for inflating legal costs, and contributing to rising ATE premiums, there being no incentive for insured parties to reduce their premium costs. There was also concern that this could breach consumer protection laws.

The LASPO now provides that premiums for ATE policies entered into on or after 1 April 2013 must be paid by the winning insured party, and will not be recoverable from the losing party. There are a few limited exceptions to this – ATE premiums can be recovered by the winning insured party in certain clinical negligence proceedings, and only to the extent that they relate to the costs of an expert report or reports. However, if the Court finds that the ATE premium is unreasonable to any extent, the winning insured party is liable for the shortfall.

The Court of Appeal’s decision in Houghton v Saunders

The case involved an application for costs by Mr Houghton in the Court of Appeal, following a partially successful application for leave to appeal a Court of Appeal judgment to the Supreme Court. Based on his partial success in the Supreme Court, Mr Houghton sought recovery of his ATE premium of $47,000 from the respondents as a part of his costs award. Mr Houghton categorised his ATE premium as a disbursement.

Recovery of disbursements in the Court of Appeal is governed by rule 53 of the Court of Appeal (Civil) Rules 2005, which provides that “the Court may in its discretion make any orders that seem just concerning the whole or any part of the … disbursements of an appeal”.

“Disbursement”, has the same meaning as defined by rule 14.12(1)(a) of the High Court Rules, being “an expense paid or incurred for the purposes of the proceeding that would ordinarily be charged for separately from legal professional services in a solicitor’s bill of costs”.

The Court of Appeal accepted Mr Houghton’s argument that the ATE premium was capable of being categorised as an expense reasonably paid or incurred by him for the purpose of the appeal.

However, despite that finding in principle, the Court of Appeal declined to allow Mr Houghton to recover the ATE premium as a disbursement. The Court held that recovery would not be in the interests of justice, because it seemed to be “patently unfair that unsuccessful defendants should have to meet significant additional costs to cover a [litigant’s] insurance against the prospect of their losing” (at [26]).

In reaching that decision, the Court of Appeal was influenced by the approach now taken in England, where ATE premiums are no longer recoverable from a losing party. In particular, the Court referred to one of the reasons behind the LASPO, being that recoverability of ATE insurance premiums imposed disproportionate cost burdens on defendants, while plaintiffs were able to litigate risk-free.

What does this mean in practice?

New Zealand litigants are unlikely to be able to claim their ATE policy premiums as a disbursement in the event of a successful claim or defence. Despite this, the fact that ATE insurance appears to be available in New Zealand and the courts have not indicated that it is not effective is likely to encourage litigants who have a valid claim but cannot afford a costs liability in event of a loss, to press a case on to trial that they might otherwise not have started or may have settled.

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