What is “Adverse Cost” Insurance and Do I Need It?
In Ontario the winning party to a lawsuit can generally expect that the losing party will be ordered to pay a portion of their legal costs. A first pay insurance policy protects plaintiffs from the risk of being ordered to pay some of the defendant’s legal costs following a trial. This is called an adverse costs award. This type of insurance has the effect of leveling the playing field when an injured person is going to court against a well-financed insurance company. A personal injury lawyer should discuss adverse cost insurance with every new client so that they can make an informed decision about whether they should buy it and if so how much.
The level of costs that the successful party is awarded depends on a number of factors. In awarding costs, one of the most important factors considered by the court is any offer to settle made by any of the parties. Even a successful plaintiff who recovers damages at trial but does not recover more in damages than a previous offer made by the unsuccessful defendant may find that they are the subject of an adverse cost award.
The potential for a successful plaintiff to have to pay a substantial portion of their damages to the defendant because the amount awarded for damages at trial was less than an earlier offer is a legitimate concern. Where the damages awarded after a long trial are modest, it is possible for the adverse cost award to exceed the amount of damages, meaning that the plaintiff’s personal assets are at risk. The risk of an adverse cost award can deter a plaintiff with a valid claim proceeding to trial in the face of an offer to settle which their lawyer advises them is unreasonably low.
Several years ago an “indemnity” product was introduced to Ontario litigants. For a premium the issuer of the product undertook to pay any portion of an adverse cost award over and above the damages awarded to the plaintiff. In the event that the case settled, or the trial verdict exceeded any earlier defence offer, the plaintiff paid the premium from their damages. On the other hand, if there was an adverse cost award, the premium was waived.
This product protected a plaintiff from an adverse cost award that required payment of all of their damages and also put their other assets, such as their house, at risk
Although this indemnity product provided some level of comfort to plaintiffs who were not seeking or expecting significant damages, it offered limited protection to plaintiffs with claims worth hundreds of thousands of dollars because it was very unlikely that any adverse cost award would exceed the amount of their damages. They could end up paying thousands of dollars from their damages and not access the indemnity policy.
More recently a new “insurance” product has been introduced to Ontario plaintiffs. For a premium of $1,350, a plaintiff can purchase $100,000 of coverage. More coverage is available for a premium of between 1% and 2% of the additional coverage. For example, $200,000 in coverage would cost somewhere between $2,350 and $3,350 depending on the nature of the case and the assessed risk of an adverse cost award. Once again the premium is only payable if the plaintiff is successful and does not face an adverse cost award.
The significant difference between the new “insurance” product and the older “indemnity” product is that it does not require a successful plaintiff to use any part of their damage award to pay costs before they can access the policy. It is a “first pay” policy.
Not only does this new insurance policy protect a plaintiff from an adverse cost award, it also covers the plaintiff’s unpaid disbursements. Most personal injury lawyers who act on a contingency basis still require their clients to reimburse them for their disbursements once the case is over. In a complex case these disbursements can easily be $50,000 or more as they include the cost of experts’ reports for accident reconstruction, economic loss valuation, cost of future care projections, etc. If the successful plaintiff has a cost award against the defendant, most of these disbursements will be paid by the defendant. However, if the plaintiff faces an adverse cost award, they may remain liable to their lawyer to pay some or all of these disbursements. Having an insurance policy to pay these disbursements on behalf of the client can allow a lawyer to incur the disbursements necessary to ensure that the case is properly prepared.
If a plaintiff is contemplating purchasing first pay insurance it is important that they reach an understanding with their lawyer as to whether or not the unpaid disbursements will be a first claim against the policy limits in the event of an adverse cost award. It is also important to anticipate how long it will take to try the case and therefore how large an adverse cost award might be. As the potential premium is rather insignificant when a plaintiff has a case worth hundreds of thousands of dollars, it is wise to err on the side of caution and purchase sufficient insurance to cover any anticipated possible adverse cost award.