Adverse Cost Protection: What Are the Risks and Benefits?

• Author: Dan Pinnington
• Date: October 31, 2016

This article is by Ian Hu, claims prevention & practicePRO Counsel at LAWPRO.

Adverse cost protection is a relatively new insurance or quasi-insurance product which can help lessen the financial blow of a lost case for both the client and lawyer. It may also be called adverse cost insurance, legal expense insurance, or after the event (ATE) insurance. While there is no standard contract or policy, the adverse cost provider will generally pay some amount of costs, fees, and/or disbursements should the client’s case lose. The premium or cost of the contract may be paid as a percentage of the value of a resolved case, contingent on a successful resolution by way of a settlement or trial verdict. In other cases, a firm may pay a flat fee to obtain coverage for all its files.

The contract or policy that governs the relationship between lawyer, client, and provider is complex. The issues may surprise you. A deep knowledge of the contract or policy and how it can affect the litigation is helpful to lessen the risks. Here are some considerations.

Discuss the terms and the risks with client

As with any advice, relevant information should be communicated to your client. Take care to discuss the potential costs, risks, and relevant terms of the policy or contract. This includes the nature of the relationship between your firm and the provider. Remember, under the policy or contract, you likely have new reporting and other obligations toward the provider, including sharing confidential information.

One of the biggest communication-related risks (and one that is universal to fees or expenses to be paid in the litigation context) is how adverse cost protection affects the “take-home” amount your client will receive when the case settles. Whether the policy premium or cost of the contract is paid as a disbursement or a fee, it is usually subtracted from the “all-inclusive” settlement. Where a successful resolution is highly likely, a client may perceive the cost to be unnecessary and insist on a higher all-inclusive settlement, thereby making it more difficult to settle a case. Costs or fees that a client feels are unnecessary can cause clients to question how much you are paid on the file. Unhappy clients, unresolved lawsuits, and allegedly high or unnecessary costs are all sources of claims. Keep in mind the LAWPRO policy does not cover fee disputes.

Whether the adverse cost provider is a licensed insurer or unregulated entity, remember, the payout is not...