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.

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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.