What is Adverse Costs Insurance?
Generally speaking, in Ontario, we have a ‘loser pays legal fees system’. This means that the unsuccessful party in a lawsuit can expect to be ordered to pay at least part of the successful side’s legal costs. In personal injury litigation it’s not uncommon for the losing party in a trial to be ordered to pay legal costs awards in the range of tens to hundreds of thousands of dollars. While deep pocketed insurance companies can afford to take the risk of losing at trial, most individual personal injury plaintiffs cannot. Adverse costs insurance, also known as ‘Trial Insurance’ or ‘After the Event (ATE) Insurance’, can help level the playing field between personal injury plaintiffs and defendant insurance companies.
The vast majority of personal injury plaintiffs hire their own lawyer through a contingency fee arrangement, meaning that their own lawyer only gets paid for their legal work if there is a successful outcome in the lawsuit. At the same time, it is often the plaintiff’s lawyer that funds the expenses, called the ‘disbursements’, of the lawsuit along the way. As long as there is a successful outcome in the lawsuit, everything works out. The plaintiff recovers money for their damages, the lawyer gets paid for their legal work based on the contingency fee agreement, and the disbursements are paid either as part of the settlement or through the legal costs award following the successful trial.
The problem, of course, arises if the lawsuit is not successful. In that case, following a trial, the personal injury plaintiff can be left in a position of having to pay at least part of the defendant’s legal costs, as well as potentially owing their own lawyer money for the disbursements spent to advance the lawsuit. Adverse costs insurance protects personal injury plaintiffs in this circumstance by providing coverage to cover these costs.
How does it work?
Adverse costs insurance coverage can range anywhere between $25,000 to $250,000. The appropriate amount of coverage for your case depends on the anticipated cost of the litigation. A typical amount of coverage for many personal injury claims is $100,000. The premium, or cost of the coverage, also varies depending on a number of factors, including the type of case and the stage of the litigation. If coverage is arranged early in the litigation process, the premium is typically between 1-2% of the coverage amount. For example, you could expect $100,000 worth of coverage to cost between $1000 -$2000.
Most commonly, the personal injury plaintiff does not have to pay the premium upfront. Instead the premium is often contingent on the plaintiff’s case succeeding. The premium is paid at the time the lawsuit is settled or after a successful trial. If the lawsuit goes to trial and the plaintiff is unsuccessful, the premium is waived and the amount of coverage specified in the policy is available to pay any adverse costs award against the plaintiff, and sometimes also the disbursements incurred by the plaintiff’s lawyer in pursuing the lawsuit. Adverse costs insurance does not pay for the plaintiff’s lawyers legal fees. Even with adverse costs insurance in place, a plaintiff personal injury lawyer operating on a contingency fee arrangement is taking the risk that if the case is not successful, the lawyer will not be paid for their legal work.
Adverse costs insurance is offered by a number of different insurance companies in Ontario. Your personal injury lawyer may already have a relationship with one of the providers, such that they are able to offer the insurance coverage to you at a discounted rate.
What are the potential advantages?
The biggest advantage of having adverse costs insurance is that it allows a personal injury plaintiff to bring a legal action against a deep pocketed insurance company without as much financial risk. Often, insurance company defendants use the threat of an adverse costs award following an unsuccessful trial for a plaintiff as a tactic to pressure a personal injury plaintiff into a low or unfair settlement.
It’s important for personal injury plaintiffs to understand that ‘success’ following a trial is largely determined based on settlement offers made prior to the trial. Even if a personal injury plaintiff is awarded damages at trial, if the amount of damages awarded does not exceed the defendant’s highest settlement offer prior to trial, the personal injury plaintiff may still face an adverse costs award. If the damages awarded to plaintiff are modest, it is very possible for the adverse costs award to exceed the amount of damages, meaning that the plaintiff would be left with a debt to the defendant, jeopardizing their personal assets. Adverse costs insurance can give a personal injury plaintiff peace of mind that, if necessary, they can risk going to trial without putting their whole financial future on the line. Even if a trial ends up not being necessary, having adverse costs insurance can sometimes help a personal injury plaintiff in negotiations with an insurance company defendant.
What are some potential drawbacks?
The vast majority of personal injury lawsuits settle before trial. So, like any insurance, in most cases you will end up paying the premium without needing the benefit. Paying the premium can still be a good investment for the peace of mind the coverage provides, but, in some smaller cases in particular, the premium can noticeably eat into a final settlement and mean less compensation in your pocket at the end of the day.
Another consideration is that, if you couldn’t pay an adverse costs award if one were made against you because of limited assets and income, then it may not make much sense to get insurance to protect yourself against one of these awards.
In some situations, having this coverage could actually embolden a defendant to fight your case through a trial rather than trying to reach an economical settlement with you, since they can be confident they will be able to recover some of their costs if they are successful.
It’s also worth noting that adverse costs insurance is not available for all types of cases, and, where it is available, if it is not purchased early in the life of a file, the premiums can be very steep.
What factors should I consider?
Adverse costs insurance can be a game-changer in the right sort of case, and can help level the playing field between individual plaintiffs and well-resourced insurance companies. But it is not one-size-fits-all and it does not make sense for all personal injury plaintiffs. Some factors plaintiffs will want to keep in mind when considering this sort of coverage include:
- The level of risk in your case (this can include both how your injuries occurred and what type of injuries you have);
- Whether you have significant assets to protect;
- Whether having adverse costs insurance is likely to impact the defendant’s negotiation strategy;
- The potential value of your case; and,
- Your own appetite for litigation risk.
In all cases, plaintiffs should talk about the benefits and drawbacks of this sort of insurance with their lawyer to get advice tailored to their individual case.
