When Should You Consider Buying Adverse Cost Insurance?
Imagine you are playing a game of poker. In this game, you get dealt an amazing hand, but you don’t have very much money left. Unlike your opponent, who has a seemingly endless amount of money! You want to bet big and win as much as you can but you’re worried that, as unlikely as it may be, that your opponent somehow has a better hand. So, what do you do? Well, the question would be made much simpler if only you had insurance that would protect you if you lost. In the world of litigation, there exists a form of insurance that does protect you in the very kind of situation described above.
What is Adverse Cost Insurance?
Ontario’s legal system generally operates in what is called a “loser pays legal fee system”. This means what it sounds like. If you lose your case at trial, you may be responsible to bear the other side’s legal costs. Your opponents, often insurance companies, have very deep pockets and don’t have the same worries. This means it is possible for them to exploit their advantage and threaten to take matters to trial in hopes of spooking you, the plaintiff, into accepting less than you might deserve. This is where adverse cost insurance (also known as trial insurance or after the event insurance) comes in. This insurance can range from $25,000 to $250,000 in value and will pay out if a plaintiff loses at trial and is ordered to pay costs.
Adverse cost insurance helps shrink the gap between insurance companies or other big defendants and plaintiffs going to trial against them. The insurance allows you to take matters to trial without the sword of costs hanging over your head. In addition, the premiums for the insurance are often deductible from the final amount awarded at trial, meaning there can be no upfront costs for the plaintiff. The premiums also tend to be quite low, ranging from 1-2% of the coverage amount.
In addition, the details of adverse cost insurance are often protected, preventing the other side from learning exactly how much coverage you have. It is, however, important to note that this is not always the case. In Fleming v Brown, the court did make the plaintiff disclose their insurance but in the more recent case of Jamieson v Kapashesit, the policy was protected by virtue of solicitor-client privilege. Jamieson also set out that this protection can be created simply by having a law firm take out this insurance on a plaintiff’s behalf.
Often this insurance needs to be purchased quite early in the litigation process, possibly long before a decision has been made to go to trial. In fact, most claims will be settled before a trial becomes necessary, in which case the unused insurance premium still needs to be paid out of the settlement amount.
Like many types of optional insurance, the decision to purchase adverse cost insurance is highly dependent on both individual circumstances and appetite for risk. It is, however, an important consideration for anyone considering or undertaking litigation.