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Supreme Court Decision Puts After-The-Event Insurance Under Spotlight

AUTHOR(S): April McClements
PRACTICE AREA GROUP: Insurance and Reinsurance
DATE: 10.10.2017

A recent Supreme Court decision confirming that third-party litigation funding in return for a share of the proceeds is unlawful in Ireland has put after-the-event (ATE) insurance back in the spotlight as the only legitimate alternative method of funding litigation in Ireland.

In what was the first Irish case to directly consider third-party funding in Ireland, both the High Court and the Supreme Court in Persona Digital Telephony Ltd v The Minister for Public Enterprise(1) confirmed that the centuries-old common law principles of maintenance and champerty remain in force and that any changes to the law in this area must be driven by the legislature (for further details please see "Old limitations on third-party funding still apply").

The Irish courts have previously confirmed that ATE policies do not fall foul of the torts of maintenance(2) and champerty(3) (for further details please see "After-the-event insurance passes champerty and maintenance test"). In Greenclean Waste Management Limited v Leahy, both the High Court and the Court of Appeal considered an ATE policy in the context of an application for security for costs by the defendant. The plaintiff had gone into voluntary liquidation and defended the application on the basis that it had ATE insurance and was thus in a position to discharge the defendant's costs if unsuccessful. While declaring ATE insurance to be valid, the Court of Appeal provided useful observations on ATE policies and the principles to be applied to them, making clear that such policies must not be conditional or contain terms which entitle the insurer to avoid liability in the future (for further details please see "After-the-event insurance given amber light").

What is ATE insurance?

As the name suggests, ATE insurance is a form of litigation or legal expenses insurance which is taken out to cover specific litigious proceedings after the event. An ATE policy is generally tailored to a specific dispute but may be structured to cover adverse legal costs awarded to the other side (should the case be unsuccessful or abandoned) and security for costs. The policyholder's own legal fees, expenses and disbursements may also be covered, although insurers will not always pay these out during the course of the litigation, opting instead to pay the policyholder only if it is unsuccessful. While this means that the policyholder must ensure that it has cash-flow arrangements in place to cover the day-to-day funding of the litigation, it does remove the risks associated with losing a case and an adverse costs award.

In relation to the premium, there are two potential ways that this can be structured. The most common is a contingency premium, whereby the premium is contingent on success and is therefore paid by the insured only if and when it wins the case. The second is a deposit premium, which involves the entire amount being paid when the insurance is first taken out. While deposit premiums are usually cheaper than contingency premiums, they are, in practice, best suited to cases where there is a high degree of confidence in a success or cases where there will be no monetary award or settlement. ATE insurers will typically consider cover only where there is a good prospect of success (ie, more than a 60% chance of success).

Comment

The Irish courts' approval of ATE insurance as a legitimate form of litigation funding in Greenclean, along with the recent setback to the development of third-party funding in Persona Digital, has brought ATE insurance to the fore. Although ATE insurance is still a relatively new insurance product and not yet widely used, a number of insurers are now providing ATE insurance in Ireland and ATE policies are likely to become increasingly common in Irish litigation.

Endnotes

(1) [2017] IESC 27.
(2) Maintenance is the giving of assistance by a third party which has no interest in the litigation, to a party in litigation.
(3) Champerty is where the third party, which is giving the assistance, will receive a share should the litigation succeed.

This article was first published in the International Law Office Insurance newsletter on 10 October 2017

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