After-The-Event insurance

Tom Davey at Factor Risk Management explains how After-The-Event insurance can help SMEs get justice

 

Access to justice is not always as simple as it should be for a smaller business. For an SME bringing a legal claim against a much larger business, having a good claim is only a small part of the picture. It is no exaggeration to say that for a smaller business, even winning a claim against a big business can be a punishing process that they regret ever taking on, let alone losing one.

 

A well-resourced business defendant with major law firm support, if it wishes, can attempt to ‘starve out’ a smaller claimant through delaying tactics and using the threat of high costs to add pressure. An SME’s management team may well decide that agreeing to a disadvantageous settlement, or even dropping a claim entirely, is the best way to avoid throwing good money after bad.

 

It doesn’t have to be this way. Recent years have seen After-The-Event (ATE) insurers begin to tailor products specifically to the needs of SMEs. This allows more of them to bring claims against larger businesses without their management teams worrying unnecessarily about the potential costs.

 

A bigger business’s first step when dealing with a legal claim from a smaller business will usually be to try to make them ‘put up or shut up’ by applying for what is called ‘security for costs’. That’s an order from the court that forces you to prove that you have the money to pay the other side’s costs if you lose your claim.

 

If the other side is a big business with a major team of high-priced lawyers defending them, those costs could be huge. Could your business prove it had potentially millions of pounds in cash available to pay those costs if you lost? For most SMEs, the answer is a resounding ‘no’. At this point, many will decide to drop their claim and not take the risk.

 

However, proof that you have ATE insurance that complies with security for cost case law will satisfy the court that you can pay those costs if necessary. That will allow the claim to continue at a much lower risk to you.

 

 

What is ATE?

In simple terms, ATE is insurance against the potential costs of losing a legal dispute. It’s called ‘After The Event’ because it’s purchased after the underlying issue has occurred, e.g. after a customer fails to pay you, or a rival has already stolen your intellectual property, but before your claim against them has gone to court. 

 

If you lose in court or give up on your claim, you may have to pay the other side’s costs. Doing that from your own balance sheet might be undesirable, impractical or even impossible, but ATE insurance takes away that problem.

 

An ATE policy will generally cover the other party’s solicitor and barrister fees, court fees and any other legitimate costs they have incurred during the dispute. It will also cover some costs you have incurred, such as expert and barrister’s fees.  Recent developments by market-eading insurers have increased the scope of coverage to include a proportion of your own solicitor costs too.  Cashflow funding as an ‘’add-on’ to coverage, or via a professional litigation funder, is increasingly available as a holistic package that solves both cashflow issues and litigation cost risk, protecting SMEs balance sheets.

 

 

A broad range of claims

We now see a very broad range of claims from SMEs using ATE insurance, for example: 

• Non-payment of subcontractors by construction contractors
• Shareholder disputes, such as valuations of shares when a shareholder leaves a business
• Claims against energy brokers for mis-selling of energy contracts
• Business interruption claims, particularly in relation to Covid
• Disputes over valuations of businesses after acquisitions
• Professional negligence claims, such as against quantity surveyors or valuers
• Intellectual property disputes, e.g. licensing disputes 

This is only the tip of the iceberg, however. SMEs will likely continue to find new ways to use ATE insurance to protect themselves during litigation as the market matures.

 

 

How much coverage can I get?

ATE policies generally provide for anywhere between £25,000 and £10m+ in coverage.

 

 

How premiums work

For policies providing up to £2m of coverage, many insurers will allow you to pay the premium at the end of the case if you win.  In other words, no premium is due if you are unsuccessful thus you have an ‘alignment of interest’ with the insurer. Law firms will often offer whole or partial contingent fee solution, so in combination with insurance the cashflow burden and cost risk is effectively managed.  Policies can also be structured so that if your opponent agrees to settle quickly, the premium is much lower.

 

 

Getting the most out of ATE insurance

Get in touch with an ATE insurance broker as early as you can in the process. The later you leave it, the higher the cost is likely to be. ‘Buy insurance when it’s available, not when you need it’ is a piece of advice we often give to SMEs.

 

Make sure you have a good law firm representing you and have the sometimes-difficult conversation with them about operating under a Conditional Fee Arrangement to keep your own side’s costs down.

 

Most of all, enjoy the under-appreciated positive impact an ATE policy can have on your mental health. We frequently hear from owner-managers that being shielded from the potential costs of losing a dispute helps them sleep at night and allows them to focus on growing their businesses rather than managing an outsize risk. 

 

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Tom Davey is co-founder and director of Factor Risk Management

  

Main image courtesy of iStockPhoto.com and CHOLTICHA KRANJUMNONG