ATE insurance and litigation funding

10 January 2018

Legal disputes are a part of today's business landscape. However, litigation does create a significant amount of risk and uncertainty.

This risk can be particularly high for SMEs. As well as potentially affecting the day-to-day operations, legal costs can be prohibitively high.

Funding options

De-risking tools are available to ensure that every business has access to justice, regardless of its size or financial position.

These are well established in the UK and in other jurisdictions around the world.

After the event (ATE) insurance protects a business should a case be unsuccessful by covering the exposure to the other side’s legal costs, with an option to insure own disbursements as well.

With all disputes, insurers will assess the case, and will generally require prospects of success in the region of 60 per cent or better before they will offer cover.

The price of cover will depend on a number of factors, including when it is put in place. If a business takes it out in the early stages of a dispute, then the premium can be around 15 per cent to 20 per cent of the limit of indemnity if the case were to settle at a very early stage.

It is also quite common for the premium to be deferred and contingent on a successful outcome. A premium in such circumstances is only payable at the conclusion of a successful case.

Litigation funding is the other side of the equation. Rather than an insurance product, this is a financial product where a third party will pay a business’s legal costs in exchange for a share of the winnings or multiple of the amount that is funded for the case.

The price of funding will be case specific but commonly is between one to three times the value of the funding.

Again, the funding is offered on the basis that, if the case is unsuccessful, the funder will lose their investment because the loan is only repaid should the case succeed.

Benefits of using ATE insurance and litigation funding together

The use of ATE insurance and litigation funding together will significantly reduce the financial risk of litigation, making it possible to pursue meritorious claims with greater confidence.

In some cases, having ATE insurance and/or funding will also give a business strength at the negotiating table, with the other side knowing that the case has the backing of independent third parties who have reviewed the merits and are prepared to back the case. Thus encouraging the other side to settle.

Litigation funding will also ensure that cash flow isn’t tied up in the dispute. This is particularly attractive to a business, because paid legal costs come straight off the profit side of a balance sheet.

If a company has more than one dispute then it can also consider de-risking a significant portion of its litigation book by obtaining both funding and ATE on a portfolio basis.

This will then allow the company to treat its book of litigation as an asset rather than a liability on its balance sheet.

The use of both ATE insurance and litigation funding is now an established part of running litigation within the business sector.

This has, in turn, helped to attract more insurers and funders, bringing costs down and creating more market segmentation within the litigation funding industry.

However, with the market becoming more complex, it is increasingly important to use an experienced broker.

As well as being able to source the most appropriate ATE insurance solution, JLT will also be able to introduce different litigation funders to ensure that a competitive market has been created for our clients’ business.

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For more information, please contact Jim Driver, Account Executive on +44 (0)207 466 6937