Litigation insurance coming of age

he ruling in Nokia Corporation v IPCom Gmbh & Co KG [2012] EWCA Civ 567 in May was notable as one of few recent cases where the UK courts have found a telecoms patent to be both valid and infringed. For litigators, it is interesting for another, less well-known reason: IPCom had taken out after-the-event (ATE) legal expenses insurance to cover its costs risk. This is one of the first examples of a reported case where such a policy has been used in the context of a highly complex piece of patent litigation.

To this extent, this judgment marks the coming of age of an industry which has long been associated with straightforward, low-value civil disputes, but which in reality has evolved beyond all recognition into a highly sophisticated insurance class that can cater for the largest and most complex of disputes, both domestically and internationally. In the current climate litigation funding secures many of the headlines, but litigation insurance is also on the rise, particularly with corporate counsel.

Another language

Litigation insurance now transcends all levels and forms of dispute resolution. Such policies are increasingly being used in complex patent disputes, bilateral investment treaty arbitrations, highly complex multi-party disputes and international or cross-border litigation, where the individual indemnities written per case range from several hundred thousand to tens of millions of pounds.

Insurers in this sector do not expect solicitors to act on a conditional fee agreement (CFA) to back a case. They recognise that in the complex commercial sector such arrangements are still rare and very few firms can afford (or would have any desire) to carry multi-millions of work in progress (WIP) on a fully contingent basis.

Historically top tier firms may have simply offered a discounted rate to win or retain important clients. Many are now embracing (lightly) discounted fee arrangements which include an additional success-based upside if the case is won. When combined with the ever more readily available external litigation financing or insurance arrangements, an almost endless array of options can be made available for a sophisticated client looking to lay off risk, reduce expenditure or manage the legal budget.
As an example, a firm may be reluctant to take risk, but may be willing to defer a proportion of their fees until the end of the case (especially if the case is approaching the later stages of proceedings). If this deferred element of fees is insured through a litigation insurance policy, this creates the effect of a discounted CFA, but where risk is taken by the insurer rather than by the law firm.

Many firms now view a sophisticated approach to alternative funding as a crucial component of their ability to tender for and win business, while maximising profitability of retainers over a traditional discounted rate approach. 2013 will also offer yet more flexibility, once damages-based contingency fee agreements become permitted in contentious business.

Assessing risk

One major question is how insurers can truly assess risk in relation to big ticket commercial and highly complex litigation. The IPCom decision demonstrates that it can be and is being done.

It is, of course, impossible to predict the outcome of litigation: the very best cases can lose and highly-speculative claims can settle due to the commercial or reputational pressure created. For insurers, it's a numbers game. Simply, if you insure (or fund) enough cases which on a reasonable investigation appear 'good', some will lose but the majority should win and provided that the pricing is right, there is money to be made.
However, becoming too exposed to one or a small number of cases without a sufficient spread of risk creates too heavy a reliance on the ability to pick winners and can be fatal.

Insure one complex patent case and you are at the mercy of the performance of your expert, your barrister, the judge and a variety of other unforeseen factors. However, insure a number of such cases and then it becomes more traditional insurance via the spread

The question of risk assessment may also have a bearing on the timing of the application. In more straightforward cases, insurers would expect cases to be presented at the earliest stage, certainly before proceedings are issued and possibly even before pre-action correspondence. However, in high-end complex commercial cases, it is rarely possible for the risk to be assessed properly at such an early stage i.e. before the parties have set out their respective arguments fully. It may not be until after close of pleadings or disclosure that a sufficiently clear risk assessment can be undertaken. In a complex patent case it may not be until the parties have exchanged expert evidence that insurance becomes available, although the cover will typically operate retrospectively.

Expansion and change

So what does the future hold for this market? Expansion '“ inevitably, but also change.

I have not mentioned the impact of the Jackson reforms, which have become law in the Legal Aid, Sentencing and Punishment of Offenders Act (LASPO), although this is where there is another important distinction between the high-value, complex commercial market and other sectors.
In small value cases, ATE insurance will only be viable if the premium is recoverable, as there simply is not sufficient margin to pay premiums from damages. However, in large complex commercial disputes, recoverability is much less relevant.
Indeed, most sensible clients will not assume that they will recover their costs and therefore never pay a premium. Rather, they recognise that the most likely positive outcome will be settlement on a global basis, where the 'pot' will be divided up to discharge the client's liabilities of which the premium is one.
The increasing use of litigation insurance in irrecoverable forums, such as the First Tier Tax Tribunal or international arbitrations, shows that recoverability is not the real driver. A risk hedge which can be purchased on the basis of a premium which is deferred to the end of the case and only payable in the event of success is enough.

In many ways, the high-end market may welcome LASPO. The market is unquestionably restricted by the need to be able to fit within the confines of s.29 Access to Justice Act 1999 and what will be permitted by the courts. However, remove this and there is total flexibility as to how the insurance can be structured and what can be covered.