After the event (ATE) insurance: what you need to know
After the event (ATE) insurance (a type of legal expense insurance) can help lessen the financial blow of a lost case for both the client and lawyer. Generally, the insurer will pay some amount of costs, fees, and/or disbursements should the client’s case lose. It is important to understand the specific policies and contracts involved and how they can affect the litigation. ATE insurance varies widely in policy terms. Depending on the insurer and the product, there can be very different duties governing the relationship between the lawyer, the client, and the insurer. Since there is no standard contract or policy, the risks can change from policy to policy. Here are some of the considerations.
How is the premium paid? What is the premium?
Typically, the premium is paid contingent on a successful resolution by way of a settlement or trial verdict. It can be a flat rate which will pay out a pre-determined amount (an example would be a premium of $1,000 to pay out up to $100,000* in the event of a lost plaintiff’s case, to be put towards an adverse costs award, disbursements, and HST). The premium may also be charged as a percentage of the recovery. If the case resolves by way of settlement or victory at trial, then the premium is paid out of the recovery. As a contingent payment, no premium is paid if there is no recovery. The plaintiff lawyer would be well-advised to talk to the client about how the premium is paid and by whom, so as to avoid a fee dispute. Keep in mind LAWPRO does not cover fee disputes. [*The amounts in this article are hypothetical and for the purposes of illustration only]
What does the ATE insurance actually cover? How much is enough?
A comprehensive policy may provide coverage in the amount of $100,000, available to pay out an adverse costs award, disbursements, and HST. Keep in mind there are many scenarios where even $100,000 is not enough. A two-week trial may result in a costs award in excess of $100,000. If so, your client is on the hook for the remainder. This can occur if the case is more complex than anticipated, or if substantial indemnity costs are awarded at trial. Your client may turn around and seek to recover the remainder from you. Did you advise your client about the limited amount of coverage and the anticipated costs of trial? The mere fact of obtaining ATE insurance can embolden your client with a false sense of security, even when coverage is inadequate.
When coverage is not enough, how are the monies to be paid out? Take for example an adverse costs award of $150,000 and disbursements of $50,000. How is the $100,000 coverage to be spread around? Does all of it go towards the adverse costs award, leaving the client and lawyer on the hook for the remainder $50,000 in adverse costs, and $50,000 in disbursements? Does all of it go towards paying the disbursements, leaving the client on the hook for $100,000 of the adverse costs award? Or should the $100,000 be pro-rated towards both the adverse costs award and disbursements? Clearly any number of arrangements can be made. Such situations can result in a conflict of interest – remember your duty of loyalty is to the client. At any stage of litigation, if a loss can be anticipated or may be likely, consider discussing with your client how the ATE policy payout is to be spread around in the event the coverage is not enough.
We are also seeing customized ATE policies which will only pay out disbursements or only pay out adverse costs awards. Whatever the arrangement, discuss the parameters clearly with your client, outlining the risks involved when coverage is limited.
What is the relationship between lawyer, client, and insurer?
Common to all ATE insurance is a contract and/or policy that governs the relationship between lawyer, client, and insurer. The relationship is complex. Some situations include, but are certainly not limited to:
Individual Files Insured
1. The insurer issues a policy to the client which pays out monies to the client in the event of a lost case. The insurer contracts with the lawyer to set out information-sharing and other duties.
2. The insurer issues a policy to the lawyer which pays out monies to the lawyer in the event of a lost case. The lawyer may be then apply the monies to the adverse cost award or disbursements.
3. The insurer contracts with the law firm to act as an underwriter. When the law firm determines a matter is more than 50% likely to succeed, the law firm may apply the policy to the matter (a term of the contract is that matters that do not meet the more than 50% likely to succeed test are not covered). The law firm may apply the policy to any/all files within the firm. The insurer ultimately issues the policy to the client.
4. The insurer issues a policy to the law firm which pays out monies to the law firm in the event of a lost case. Every file within the law firm is covered by the same policy.
As you can see, numerous types of ATE insurance are available and the products can be confusing. Carefully read the terms of the contracts or policies involved, and explain to the client the various duties involved.
Discuss the terms and the risks with the client
As with any advice, relevant information should be communicated to your client. Take care to discuss the potential costs, risks, and relevant terms of the policy and/or contract. An insurer may require a lawyer to provide documents and other confidential information. If this is the case, obtain consent from the client. If there is a contract between the lawyer and insurer, it may be wise to advise the client of your reporting and other obligations towards the insurer.
One of the biggest communication-related risks (and one that is universal to fees or expenses to be paid in the litigation context) is how ATE insurance affects the “take-home” amount your client will receive when the case settles. Whether the policy premium or cost of the contract is paid as a disbursement or a fee, it is usually subtracted from the “all-inclusive” settlement. Where a successful resolution is highly likely, a client may perceive the cost to be unnecessary and insist on a higher all-inclusive settlement, thereby making it more difficult to settle a case. Costs or fees that a client feels are unnecessary can cause clients to question how much you are paid on the file. Unhappy clients, unresolved lawsuits, and allegedly high or unnecessary costs are all sources of claims.
Conflicts of interest, off-coverage positions: potential pitfalls
Like any insurance, there are scenarios where the insurer may take an off-coverage position, leaving you and your client holding the costs & disbursements bag. If the insurer takes an off-coverage position, or an off-coverage position is imminent, the unintended consequences can include both the obvious, such as being on the hook for all costs & disbursements, and the less obvious, such as requiring the plaintiff’s lawyer to get off the record or seeing defence settlement offers withdrawn.
Take for example where an insurer will only insure a case if the plaintiff’s lawyer assesses the case as having a better than 50% chance of winning. At the beginning of the case, the plaintiff’s lawyer assesses the case and the case is covered. But prior to trial, a plaintiff’s expert assesses the client and determines the client’s health has improved significantly. The case no longer has a better than 50% chance of winning. If the client instructs the lawyer not to inform the insurer about the devastating developments, for fear of losing coverage, the lawyer must obey as per the duty of loyalty. But the lawyer also has a conflicting contractual duty to inform the insurer. So on the one hand, the lawyer must not inform the insurer about the change in the case’s prospects (as per the client’s instructions). On the other hand, the lawyer must inform the insurer about the change (as per the contract with the insurer). The lawyer ends up in a conflict of interest/duties and may have to get off the record.
Going further, if the insurer takes an off-coverage position just prior to trial, the plaintiff’s lawyer may advise the defendant that the case is no longer covered. This can tip off to the defendant (rightly or wrongly) that something has happened to significantly weaken the plaintiff’s case, and emboldens the defendant to go all-in on the trial by taking offers off the table. Such a situation would not have occurred had it not been for the mere fact that ATE insurance was obtained and subsequent off-coverage positon was taken.
In addition, a conflict of interest may not be immediately obvious and may develop as a case progresses. Take the following hypothetical: The policy will pay only disbursements, but excludes any costs, in the event your client loses at trial. Your retainer agreement with your client provides your client will owe you nothing if you cannot reach a successful resolution. As the case develops it becomes apparent the client’s case is not worth anything. Before trial, you receive a Rule 49 offer from the defendant to settle the file to withdraw the action on a without costs basis. If you accept the settlement, the insurer will not pay your disbursements, as the insurer only pays out following a trial verdict. Merely withdrawing the action does not count as a trial verdict. You may now be in a conflict of interest. If you recommend rejecting the settlement and going to trial, knowing your client will likely lose, your disbursements will be paid but your client will have to pay the defendant’s costs (your client stands to lose, you stand to gain). If you recommend accepting the settlement, your client walks away from the file owing nothing, but you must write off your disbursements (your client stands to gain, you stand to lose).
ATE insurance has become more commonly considered as an option. If you or your client are obtaining ATE insurance, review and understand the policy and contract involved. Set enough coverage for the matter. And watch for and avoid conflicts of interest.
By Ian Hu, Counsel, Claims Prevention & practicePRO, LAWPRO